Friday, 4 December 2009

Bankers' Bonuses built on Dubai Sand

The debate on RBS Bankers' bonuses makes one major assumption to justify the £1.5bn payout. That is that RBS investment bank made a “profit” on its dealings of £6bn. But did they really? The clue is in the title of the organisation, an “investment” bank. One thing we know about investments is that they go down as well as up and when they did so spectacularly last year, it was the taxpayer who picked up the bill, not the investment bankers.

The new International Accounting rules, foisted on the world by the big four accountancy firms, defines “profit” these days as basically the net increase in the value of the organisation i.e. the change in the balance sheet. So RBS can claim a profit, when all that has happened is that their investments have increased in value. Then, someone suddenly realises that those over-valued assets in Dubai really are just piles of sand and suddenly those profits built up over several years disappear. Do the bankers then pay back their bonuses? Not on your nelly!

In other words we all learnt last year that “investment” banking is just “casino” banking, where the dealers hold all the cards. The other factor about profits is that to generate them, someone has to make a loss. Often it is you and me through our pension funds, which despite the gains in the stock market over the years, continue to disappoint pension holders. Equitable Life anyone?

The government should veto the RBS bonuses and call the RBS directors' bluff. After all governments around the world now hold large shareholdings in many of the banks. If they all agreed that these bonuses are obscene and built on Dubai sand and acted together to curb the avarice of the financial establishment, we may yet see real change in the way the banks do business.