Unlimited bonuses for bankers – in this climate?

The financial crisis very nearly destroyed the world’s economy. Does Kwasi Kwarteng remember what caused it?

Buckle up. Thanks to Kwasi Kwarteng, it looks like bankers’ bonuses are coming back and London’s financial casino will get the go-ahead to reopen its doors, so the recipients can roll the dice with our money.

The new chancellor seems to have forgotten – or wilfully ignored – one of the most important parts of his job. It is, before he even gets out of bed in the morning, to ask this crucial question: will my plans make it more or less likely that a big bank tips up and proceeds to set off a disastrous chain reaction?

This is something that every finance minister, watchdog and central banker worth their salt should consider too before they get their first coffee.

If the answer is “more likely”, then don’t do it. Move on to something else. If the answer is “maybe more likely”? Don’t do it. Move on. Don’t even spend any more time thinking about it. Put the idea in the waste bin alongside the latest missives from the Bow Group, the Institute for Economic Affairs and the Flat Earth Society.

Still tempted, because it’s only a maybe and risks bring rewards? Oh dear. OK, get a flunky to dig out the cuttings from the financial crisis. Remember that? It seems to have been forgotten, what with Covid, Ukraine, the energy crisis and the cost of living crisis. That is a profound mistake.

The financial crisis very nearly destroyed the world’s economy. At its low point, there were stories doing the rounds about hedge fund managers buying herds of sheep because they thought we were heading back to the days of barter. For a while, we teetered on the brink of armageddon. Do you remember what caused it?

In the run-up to the financial crisis, the bonus boys (they were nearly all boys, which says something if you think about it) went bonkers. The entire financial services industry went bonkers, all in pursuit of enough cash to fill several fleets of G4S trucks, complete with outriders on motorbikes and maybe the odd authorised firearms officer from the Met keeping a watchful eye from a distance.

If people are incentivised to take stupid risks and do bad things, they will take stupid risks and do bad things

They played endless roulette, craps and blackjack with our money. They put together packages of dodgy mortgages and pushed them onto other financial institutions, pension funds, local councils – you name it. It was the equivalent of spreading financial Covid around the world.

While this was going on, other traders were manipulating interest rates, currency markets, even gold and silver prices, anything they could mess with, all with the aim of bagging a fat bonus cheque at the end of the year. We still don’t really know half of what they were up to.

And when they lost? Billions of pounds that could have been spent on building schools and hospitals, and paying the people working in them properly, were instead diverted into bailing out banks. Kwasi Kwarteng... read those cuttings.

That this happened shouldn’t have come as a surprise. If people are incentivised to take stupid risks and do bad things, they will take stupid risks and do bad things.

The bonus cap was born of an effort to bring some sanity to the situation. The Bank of England groused. So did George Osborne and the Treasury. It’s a bad idea, they said. It will deny banks the flexibility to pay their bigwigs less when they’re under the cosh and need to preserve their capital. That argument is highly questionable because banks have a habit of protecting bonus pools even while they’re struggling in quicksand, for fear of losing their rainmakers if they don’t.

Combined with other measures to limit bad behaviour, the cap ultimately brought a little sense back to an industry which had none. In its worst year, it racked up nearly £1.5bn worth of fines in Britain alone.

Why would anyone want to return to that?  Well, Kwarteng clearly thinks he’s found an advantage, having crippled the City of London’s position as a global financial centre by yanking it out of the European Union’s single market. But an advantage to whom?

Let’s assume he’s right, and some of the people who’ve been enjoying the high life in Europe’s financial centres, like Paris, Amsterdam, Dublin or, um, Frankfurt (is there a high life to be had in Frankfurt?) return to the City. Who does that really benefit? Is the potential of some extra tax revenues from highly paid individuals really worth the risk of the bonus boys burning down the house and having the taxpayer foot the bill?

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Then there are the optics. Let’s not forget the optics, because while some financial commentators will ignore them, they are very relevant to this and they are absolutely terrible. Britain is a country in which people are literally going without food and where the demand on food banks is so great that those fine institutions are running out of it. Mr Kwarteng appears not to have noticed.

Worse, he appears to want to turn the watchdogs into their cheerleaders, whose job is to bring in more of this business, rather than keeping an eye on people who don’t even need to be given an inch to take it as licence to suit up and sit down at the gaming tables.

He seems to want to give the whales as many free spins with our money as they desire, money which would be better spent on feeding people, all in the hopes that it will fulfil some wild Brexiteer fantasy. Bonfire of vanities? This is a bonfire of crazy which could burn us all.

So, Kwasi Kwarteng, put the idea in that wastebasket where it belongs. Then, if there’s someone in the Treasury who is old-fashioned enough to smoke, borrow their lighter and let the proposals burn there before we all get caught up in the flames.