UKFI (UK Financial Investments Ltd), which is managing the British government’s investments in banks on behalf of taxpayers, is quite happy for Stephen Hester, the new boss of the UK’s bailed out Royal Bank of Scotland, to be paid £10 million (US$16 million) if he gets the share price back to £0.70.
Presumably they think we should be, too. Why? Well, Hester is one of the few untainted bankers of any stature left in the UK and, as such, he has rarity value; he will have done the nation a great service if he nurses the bank back to health.
Yet his remuneration is inappropriate on two counts — and this is not just the politics of envy.
The fact that UKFI and the British Treasury are relaxed about Hester becoming even more filthy rich reveals how unhealthily the bankers still dominate the discourse.
First, it is depressing that vast riches are the only way to lure a banker into public service. Imagine, as one veteran observer said to me, if Winston Churchill had vowed to fight them on the beaches — but only if he got his performance-related long-term incentive plan.
The other justification proffered for Hester’s rewards is that he will cash in only if he succeeds. But succeeds at what? A share price is a very crude measure, and it is far from obvious that this is the best gauge of whether he really has served the bank or the country well.
It would be unfair to personalize this, because the row over Hester’s pay is rooted in a potential conflict in the mission of UKFI. Its priority is to return banks to rude commercial health and to “normality” — in other words, to get them off the government’s books as quickly as possible, preferably at a profit.
But there is also an expectation on UKFI to get credit flowing back to industry. For individual banks it might make sense to deleverage as quickly as possible, but for the system as a whole, that is unlikely to be the best thing.
Richard Lambert, the director general of the UK employers’ group the Confederation of British Industry (CBI), is deeply worried about this — as is, clearly, Bank of England governor Mervyn King.
Despite cuts in UK interest rates to close to zero, and despite various schemes to free up bank lending, the cost of finance has risen and its availability has fallen.
Lending to the real economy — firms outside the financial sector — has plunged; data from the Bank of England shows that the flow of net lending in April to business was negative, with a net contraction of £5.4 billion, the largest monthly fall for nearly a decade.
In its Financial Stability Report, the Bank warns that even without any further nasty developments, there is still a risk that the banks may not supply sufficient credit to support growth in the economy.
There is also evidence that firms are nervous about the future supply of credit: the Bank of England has picked up an increase in the number entering into “forward start” agreements, where they put extensions to borrowing facilities in place well ahead of time.
Forward start agreements cost more, so their new-found popularity suggests that firms are putting a premium on peace of mind and on making it easier for their auditors to sign off their accounts as a going concern.
Unsurprisingly, given these conditions, investment by businesses is falling off a cliff. The CBI has forecast that it will drop by 12 percent this year, and a further 1.4 percent next year, because of a trio of uncertainties: about credit conditions, about the health of the public finances and about the tax regime.