The people v The banker: The payouts party is over

Have the men who run Britain's banks finally realised that the public will not tolerate the industry's inflated bonus culture? David Randall reports

"So," said Alice to the Mad Banker, "let me get this right. The Royal Bank of Scotland (RBS), which lost £28bn and is kept from bankruptcy by taxpayers' money, will pay staff £1bn in bonuses; people at the organisation that looks after government cash in bailed-out banks will get bonuses; so will staff at the Financial Services Authority (FSA), the very people charged with reining in bonus culture; and Merrill Lynch, which lost $27bn (£19bn) last year, will pay $3.6bn in bonuses and make instant millionaires of no fewer than 700 staff?" The Mad Banker puffed out his chest. "Correct," he said. "More tea?"

The past week was supposed to be about stopping such fantasy economics. MPs were huffing and puffing; leading bankers were lined up for a "show trial" at a Commons select committee; and there was more than a whiff of taxpayers' revolt in the air. At long last, some long overdue scores would be settled, and banks would get their comeuppance. That – with bankers making few concessions to MPs, one regulator forced to resign, and the fate of another sealed – is not how things seemed to work out. But a survey of clearing banks by The Independent on Sunday has found evidence that, in private, some are starting to respond to the pressure. The People vs the Bankers is not yet a lost cause.

The case for the prosecution has not wanted for advocates. Since last weekend, politicians – including cabinet members – have formed a long queue to step up to the mic and condemn bonuses. Message boards throbbed with the indignation of thousands of taxpayers. And there, on Facebook of all places, was John Prescott, urging any passing social networker to sign his online petition to "Ban the Bonuses". They are, he said, "morally and economically outrageous".

Talking almost as tough, and with the theoretical ability also to act it, was the Chancellor, Alistair Darling. But his rhetoric was not all it first appeared. Asked for his considered opinion about RBS payouts, he replied, in his lawyerly way: "No one that is associated with these large losses should be allowed to walk away with large cash bonuses," a statement with wriggle room large enough to hold a bankers' convention. His remedy, despite holding 68 per cent of one bailed-out bank and 43 per cent of another, fell a long way short of popular expectation. There would be a review. Not, you understand, one that would address the issue of immediate bonuses (its production would take 10 months). It would be headed by Sir David Walker, a man known for providing accommodating establishment whitewashes.

The gulf between the financiers' view of the world, and that of the People (or their representatives) was soon apparent when the Treasury Select Committee opened its two-day questioning of bank chiefs. There were, from the most expensive suits in the room, just as their PR people had advised them, "profound" apologies, which actually turned out to be rather qualified. Andy Hornby, former chief executive of the deeply indebted HBOS (now merged with Lloyds), said he was "not personally culpable for the crisis", although he did concede the bonus system was flawed. And it was possible to detect in the words of Lord Stevenson, ex-HBOS chairman, something less than a full appreciation of what had been perpetrated. "There has been huge anxiety and uncertainty caused for particular of our colleagues," he said, before adding, almost as an afterthought, "but also, for periods of time, for our customers."

What no one seemed to realise, said these four horsemen of the banking apocalypse (none of whom has a banking qualification), was how much of their own money they had lost. It was all very regrettable. Sir Fred Goodwin, the man who led RBS on an orgy of acquisitions (the list of companies it wholly or part owns runs to 28 pages), said that no one had foreseen "things would change as quickly as they did".

RBS's vision still seemed impaired on Wednesday, when it was announced that the loss-making bank, which can pay £1bn in bonuses, cannot afford to keep 2,300 people on the payroll.

But the most devastating intervention at the committee came not from some outraged tribune of the people, but from the written evidence of Paul Moore, a former head of regulatory risk at HBOS. He wrote: "No one wanted or felt able to speak up for fear of stepping out of line with the rest of the lemmings who were busy organising themselves to run over the edge of the cliff behind the pied piper CEOs and executive teams that were being paid so much to play that tune and take them in that direction."

For warning of the bank's recklessness, he was fired, although he subsequently sued and received "substantial damages". And who dismissed him? Why, none other than Sir James Crosby, then head of HBOS, now deputy chairman of the Financial Services Authority, and a reliable provider of non-boat-rocking reports to the government, among them one on identity cards. On Wednesday, Sir James resigned. The next day, it was announced that a second regulator, Glen Moreno, acting head of UK Financial Investments, also had some form (in his case association with a bank accused of aiding tax avoidance), and would leave.

Public anger was now greater than ever. With regulators the only real casualty of the week, and the banks seemingly unmoved, respondents to the IoS poll conducted by ComRes were as furious as mere statistics can ever suggest. Asked if there should be a legal limit on pay in bailed-out banks, 84 per cent agreed, and 82 per cent thought that senior executives should repay bonuses. (Some 77 per cent also thought that MPs should lead by example and hand back their allowances, a reflection of the feeling that the culture of exploiting a system for personal enrichment had – as incessant stories about MPs finagling expenses showed – permeated so deep into the political class that they were incapable of confronting it.) Impressed by the fury on its message board, the IoS put some of the questions raised by readers to the clearing banks. Their answers (reported verbatim on our website) show that the pressure from public, government and regulators is beginning to have an effect.

First, we asked if they thought their bonus system was flawed. HSBC was defensive, saying that 80 per cent of executive director pay was "performance related, and Lloyds insisted that most staff "earn an average of £17,000" and receive a bonus of about £1,000. But RBS admitted that pay "in some parts of the industry is far too high", and Barclays went further. Saying that the pursuit of yield drove increased risk-taking in capital markets, it conceded that "willingness to take risk was definitely fuelled by the banks, and that [this] willingness was fuelled by compensation structures in the industry". It said adjustments needed to be made to compensation, and that the bank was conducting its own internal review, the results of which will be announced at its April AGM.

While no bank would divulge the exact sums to be given as bonuses this year, Stephen Hester, now chief executive of RBS, said that its bonuses would be reduced by "a greater amount than any bank I know", and Barclays said that, with profits 14 per cent lower than 2007, bonuses would be down 48 per cent, with executive directors waiving any right to a payout. It said staff numbers were up more than 20,000 but staff costs down 10 per cent. No bank would disclose how many staff will get bonuses, or give a maximum individual payout.

Finally, we asked how each bank for its response to the wider bonus debate. RBS and Lloyds replied with generalities, but HSBC emphasised that pay should be "linked to long-term success". Barclays said it welcomed the debate and the "dialogue" between banks and the FSA. It said its Remuneration Committee had been working "for some months now" to ensure policies are "right for the future".

Time will soon tell how much of this is PR blether. But there are signs, perhaps only early ones, that the banks are starting to realise that the old mad tea party is over.

A week in the city

Sunday

The Government rejects calls to impose a rigid cap on bank bonuses.

Ministers said they were unable to use their shareholder position to influence bonuses despite the growing clamour for action from opposition parties and backbenchers. They added that efforts to turn ailing banks round would be hampered if bonuses were capped.

The Irish government prepares to unveil a £6.1bn rescue package for its two largest banks, Allied Irish and Bank of Ireland.

Monday

Number of available mortgage deals slumps to a 10th of levels before the credit crunch began. There are now 1,542 different home loans available across the mortgage market compared with 15,599 in July 2007, according to the financial information group Moneyfacts.co.uk.

The fall in choice is particularly acute for people trying to borrow a large proportion of their home's value. Those with a 5 per cent deposit have just three products to pick from, down from 1,079 in July 2007.

Tuesday

Former bosses of Royal Bank of Scotland and HBOS apologise to MPs on the Treasury Select Committee for mistakes that led to the banking crisis.

The former RBS chief executive Sir Fred Goodwin and former chairman Sir Tom McKillop said they "could not be more sorry" for what had happened and admitted the bonus culture had contributed to the crisis and needed to be reviewed.

RBS also announced more than 2,000 job cuts.

Wednesday

Pressure grows on the Financial Services Authority (FSA) deputy head Sir James Crosby after he allegedly sacked a colleague, Paul Moore, a risk adviser at HBOS, while he was chief executive of the bank in 2005. Mr Moore had warned that the bank had a dangerous sales culture.

HBOS says Mr Moore was made redundant from the bank and that the allegations had no substance but the Treasury Select Committee insist he appear before them to explain his case.

Thursday

Sir James Crosby resigns from his post as deputy head of the FSA but insists that he has done nothing wrong. He says there is no substance to allegations he sacked Mr Moore over his risk warnings, but maintains that he does not wish to drag the FSA through controversy, so is stepping down.

Mr Moore sticks by his allegations.

Friday

Lloyds TSB shares plummet after news that its subsidiary, HBOS, has made record losses of £10bn during 2008.

Lloyds Banking Group, as the giant is now named, acquired HBOS in a merger in October and said its own pre-tax profits for last year would come in at £2.4bn, but it warned that the losses at HBOS and the deteriorating market would lead to a pre-tax loss of £10bn.

Saturday

Speculation grows that Lloyds Banking Group may be nationalised.

The G7 group of policymakers meet in Rome to discuss what they can do once interest rates cannot be lowered any further.

The Bank of England and European banks are said to be considering printing money as the next step, with banks buying assets to raise the money supply and boost demand in the economy. Quantitative easing, as this is called, was used with mixed results in Japan in the early 2000s.

What planet are they on? A different one from the rest of us

Eric Daniels Chief executive, Lloyds Banking Group

Earns £1m basic salary, and £1.79m in bonuses. His total remuneration (since 1999 or length of service) was £10.2m. "The recipients of bonuses that I am referring to are people like you and me. They have relatively modest salaries."

Sir Fred 'the Shred' Goodwin Former chairman, Royal Bank of Scotland

He was paid £4.2m in 2007 plus bonuses of £2.8m. "The considerable losses for me and my colleagues who had shares in company over the last year reflect what has happened."

Lord Stevenson of Coddenham Former chairman, HBOS

Earned £821,000 in 2007, and is thought to have received at least £600,000 on his departure from HBOS. "There's been a lot of talk about the S-word... Our shareholders, all of us, have lost a great deal of money, and our colleagues have suffered huge anxiety and uncertainty."

Sir Tom McKillop Former chairman, Royal Bank of Scotland

He took home £750,000 in 2007. "Securitisation was perceived as a stabilising influence in financial systems. It didn't turn out that way. Everyone has been caught out by that."

Bob Diamond Outgoing chief executive, Barclays Capital Investment Bank

The highest-paid director on Barclays' board earned more than £20m in 2007. "I prefer the phrase incentive compensation [to bonus]. I believe in incentive compensation... We have performed well in the context of a very difficult environment."

Andy Hornby Former chief executive, HBOS

He earned £1.9m in 2007, a total remuneration (since 1999 or length of service) of £7.6m. His annual salary is £940,000, plus £700,000 bonus. "I have never received a single penny in cash bonus... I invested every single penny of my bonus in shares. I have lost considerably more than I have earned."