A dun of iniquity

One of the commenters to a post early this week questioned why the bonus tax is iniquitous, so here goes:

1. One of the principles of fair taxation is that it should apply to all tax payers equally. That doesn't preclude progressive taxation or even applying particular provisions to particular activities, but to discriminate against bankers and people working for banks smacks of vindictive victimisation.
2. A further principle is that taxes should not be applied retrospectively, which is why the Budget sets out the tax rates to be applied for the financial year starting after the Budget. To create a new tax in the middle of the financial year to be imposed on bonuses to be paid for work already performed goes against that principle even if the bonuses have not yet been determined or awarded.
3. The banking industry is very wide. Although there are many companies that might have acted recklessly before the credit crunch, most of those (Bradford & Bingley, Northern Rock, RBS, HBOS, Lehman, Bear Stearns, AIG) have now disappeared. The argument that the rest have all benefited from the bailout is largely incorrect. Many other financial institutions were not involved in investment banking activities. For example, the Australian banking system is very conservative, so that ANZ, Commonwealth Bank, National Australia Bank and Westpac, who have all in the past lost heavily through ambitious traditional bank lending largely avoided any exposure to losses on assets similar to those held by the British banks. Similarly, it is hard to see why Standard Chartered or HSBC who do most of their business in Asia and emerging markets should be penalised for the activities of banks exposed to the US and UK asset backed securities markets.
4. The government says that it bailed out the UK banks and all the other banks benefitted as a result. To an extent that is true, but they only bailed out 2 UK banks and nearly crippled a third (Lloyds) in the process. On the other hand, they didn't bail out any of the foreign banks on whom they are imposing this tax. Those banks are in London for the international debt and foreign exchange markets. They are not in London to provide credit to the British markets, and many of them will have very few dealings with RBS, HBOS and the other failed UK banks. They are there to buy and sell international syndicated loans, letters of credit, to finance exports and projects, often in dollars and euros, not sterling, and in parts of the world where neither RBS or HBOS ever show their faces.
5. Traders in banks are typically paid a far lower base salary than anyone would reasonable expect to be paid for the hours that they put in, and the better and more successful they are, the greater the percentage is paid in bonus. If the government doesn't like that balance they should regulate against it rather than tax the traders after the event.
6. Believe it or not there are many people working for banks who do not use any capital. Typically they work in an advisory capacity, perhaps on mergers and acquisition, privatisations, PFI, project finance advisory work and private placements. The only risk to the bank is the overhead and base salary against failure to earn fees, yet the fees earned, entirely from the wits, knowledge and hard work of the bankers concerned can be substantial. To stop the bank paying these people bonuses is clearly wrong-headed.
7. On the debit side of the balance sheet, the government failed in its supervision of 4 failed banks and 1 failed building society and they completely missed the fact that AIG was running a $800 billion credit default swap book unregulated out of its offices in Curzon Street that underpinned a vast part of the securities market. To turn round and blame all the remaining banks for the government's own failings is no more than we would expect from this clapped out administration.

So I am not surprised that the bankers are upset, but neither am I surprised that the government would use it as a smokescreen for a desperate Pre Budget Report.

Grouchy doctors can save the NHS

The PBR says that the NHS is ring fenced from cuts, but imposes NI costs on the service. But leaving aside the fact that we are run by mendacious headless chickens, what can be done to make savings?

One idea comes from the training of doctors, who these days are trained in their bedside manner, dealing with patients very differently from their older colleagues.

But that care comes at a cost, because the more high-handed older consultants cover more patients in less time than new trainees. Kindness costs nothing? Dream on.

You ain't seen nothing yet

The 1% increase (0.5%employer, 0.5%employee) in NI contributions will raise £3 billion. That's 1% of salary, not 1% extra NI. So it would take another 66% of workers' salaries to wipe out the deficit.

One of my favourite cartoons

.. features two old soldiers, one of whom says to the other "Young people! Our generation fought so they could be free, and now they go and do what they bloody well like."

I was reminded of this by the talk that the government, in a fit of pique, says (through the Peston mouthpiece) that it wants to tax the banks or the bankers, well the British one, or maybe those that are in Britain or something.

After all, runs the government's line to the media, we bailed out the banks, so we deserve something back. Well yes we did. We bailed them some of them out, and got something back in the form of equity at a knockdown price. We guaranteed some of their assets, and they paid us a fee. The government negotiated these deals over many months, so are they telling us they negotiated a bad deal? Indeed, can anyone trust this government if they negotiate a deal in good faith only to find that the government stitches them up by changing the law shortly afterwards?

But, protest the government, if we hadn't bailed out the banks the whole system would have collapsed and all the banks would have gone under. So this justifies taxing not only UK banks but also those that operate here. Not so, the banks that would have gone under were the ones that did go under. The other banks had their own capital cushions and would have survived, in part because they have the capacity to rebuild their capital through earnings, which is precisely what the government wants to tax.

The idea that the government want to slap a tax on foreign banks in London just because they are making a lot of money, from amongst other things, advising the government on dealing with the bailed out banks, shows that the government doesn't really have a clue. Somebody should draw a cartoon about this.

I've got a little list

It looks like a mole at RBS has been feeding a line to the Times to try get their bonuses back, because the paper carries this story this morning

"More than 1,000 investment bankers have quit Royal Bank of Scotland to join rival firms for guaranteed cash bonuses and big salary increases, according to banking sources.

The staff exodus, which has cut a swathe through the senior ranks of RBS, has been gathering pace since the government first ordered it to clamp down on bonuses this year.

Although they account for less than 5% of staff in RBS’s investment division, the traders and corporate financiers who have been lured away are estimated to have earned it between £600m and £700m last year — almost 8% of its 2008 income."

Well hang on a bit because these numbers don't stack up, because that is £600-700k top line revenue per "investment banker", which would have been the minimum top line revenue to stay in your job as an investment banker 20 years ago - say $1 million, and that would be the benchmark for bankers who don't use the balance sheet (M&A, some corporate finance advisory). Touch the balance sheet and you would have to make far more in fees and spread to justify your seat. Personally I wouldn't be seen dead in a team that kept bankers who performed so poorly.

And the giveaway is that the 5% of staff made 8% of income. Well if you are only making 160% of the average when all the IT, operations, HR, PR, security, audit and management are factored in, then like the Poobah-before-Mandelson said, "They'll none of them be missed".

The Feds always get their man

Ben Bernanke doesn't get everythng right, but he is righter than most, and on the state of UK, yes UK, bank supervision he is spot on

"Over the past few years the government of Britain removed from the Bank of England most of its supervisory authorities. When the crisis hit - for example when the Northern Rock bank came under stress - the Bank of England was completely in the dark and unable to deal effectively with what turned out to be a destructive run and a major problem for the British economy.

So currently the trend in UK and elsewhere is quite the opposite of taking away those authorities - it is to give the central bank the authority and information it needs to know what's going on in the banking system... for financial stability maintenance I think it's very very important for the Fed to have that kind of information and insight into the banking system"

Why the fuss?

Let's get something straight: there is nobody at RBS who is worth £1m a year even in a good year, and no US bank is going to rush out to grab their disaffected staff, but...

Why are the government having a go at the bank in the press for possibly paing out mega-bonuses? After all, RBS is 70% owned by the taxpayer, and will soon own 80%, so the Chancellor can tell the board what to do through a special resolution and they must obey.

So, if the government really wants to change the pay policy at RBS, they can.

Here's one I made earlier

Margaret Thatcher ruined the British manufacturing sector, right? Well, probably wrong. While it fell from 25.8% of GDP to 22.5% under the Thatcher government, the general increase in GDP meant that the size of the sector increased significantly.

There was another fall during the seven years of the Major government to 20%, but in the 12 years since 1997, it has fallen to ... 11%. Bearing in mind that a significant proportion of that capacity is actually food processing which is likely to be processed near the point of consumption because food doesn't travel as well as, say, ball bearings or machine tools, and we can see that it has fallen far faster under Labour, who as we all remember were critical of the size of the industrial base when they came to power.

Of course a simple look at Labour policies shows the reason, favouring the film industry, R&D (not tied to UK production) and the offshore shipping industry with investment allowances not permitted to the rest of business whilst reducing the rate of capital allowances and eliminating finance leasing. It is hardly surprising that there has been no investment in industry, and its relative importance in the economy has halved under Labour.