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George Osborne has spoken out about to say that the Conservatives would seek to control large bonuses paid t bankers. As I said, this is an area where the government is trying to draw a line between Labour and Conservatives, so Osborne's move upset Mandelson as muchasit upset Conservative supporters.

We know that because Lord Mandelson has come out with the following criticis of the shadow chancellor.

"George Osborne is a crowd pleaser. He and the Tories had nothing to say on the subject of bonuses to FSA during their consultation on the subject but because he was being interviewed by the Guardian, he says what he thinks Guardian readers want to hear.
"The rewards (for bankers) need to be linked to risks. The problem is when excessive rewards start driving excessive risk taking."

Say that again.

"The rewards (for bankers) need to be linked to risks."

That was what I thought you said, but I didn't realise you were that stupid. Actually the rwards for bankers need to be linked to profits, and the risks taken to earn those profits should be linked to the amount of capital available in the bank. Which is how Basel II works.. Except that as we know it doesn't work well because banks are required to set regulatory capital against assets according to the condition of the assets from time to time rather than the worst case possible, which means that banks have to start scrabbling for extra capital when their assets turn bad.

But that has nothing to do with salaries. Two steps that I would advocate for banks that are in receipt of government support (shareholdings, asset protection and maybe even normal deposit protection):

1. No bonuses paid to any emplyees or directors if and to the extent that the bank would make a loss.

2. All guaranteed/contracted but unpaid bonuses would be deducted from Tier 1 capital on the date that they ae guaranteed rather than the date that they are paid. It is ridiculous to think that a bank can agree to pay a bonus irrespective of future results and still treat that amount of part of the capital it can put at risk. If an amount is agreed to be paid as bonus at some point in the future it can't be used as capital to absorb any future losses.