Regulation, regulation, regulation

There’s still lots of huff and puff about bank bonus going on.  I see today that “reluctantly” it has been agreed they can pay themselves what they want. 

Mathematically and economically, I don’t think the arguments for paying unlimited bonus are valid, but then despite my A-level I don’t claim to be an economist – particularly since it appears to me to be a particularly nasty term of abuse bearing in mind what “economists” have achieved over the last few years! 

But I am a psychologist, and psychologically,  the current type of regulation and control is a complete waste of time.  Take banning or limiting “bonuses”.  

Imagine you’re a banker.  Bonuses are banned.  No problem, you just call the bonus something else.  As a fee-based IFA I found it irritating that Equitable Life was called a “non-commission paying office”. They had dozens of people who were not Directors who were paid more than five times the national average wage – they might not be paid “commission” (maybe, “volume business override”), but the effect was the same and the “don’t pay commission” claim is no more convincing than the “non-bonus” argument.   If you call it, “excellent service award”, “productivity related payment” or, indeed “backhander for being greedy”, it isn’t a bonus is it?  What’s in a name?

Of course, the argument is that the regulators will be wise to this.   That rests on the assumption that the regulators are smarter than the bankers (the justification Lord Turner gave for bonuses for FSA staff – he needs the best).   Unfortunately, the initiative is with the poachers, not the gamekeepers.  Even if the regulators are smarter (although the good ones will be tempted to the “dark side” by the offer of a “non bonus” of billions instead of a salary), it is the bankers who get to plan to avoid the regulations, and the regulators have to react after it has happened. 

So we had regulation in banking that was supposed to stop too much risk being taken.  Fine, said the bankers, we’ll call the securitised junk loans triple-A rated investments – and the regulators won’t catch on until it is too late.  Obviously, it will be something else next time because the junk gate is closed.  But the same thing will apply with bonus, at some point the regulators will realise that big payments are being made, risks are being taken etc., but it will be after the event, because the initiative is with the banks to subvert the rules. 

Mind you, regulators probably won’t want to catch bankers anyway.  It’s a tribal alliance issue.  You might have heard of “Six degrees of separation”.  Among the US Fortune 1000 there were, in 2003 an average of 4.5 people between any two Directors and 3.5 between any two Boards.  The UK financial community is a lot smaller and more tribe-like.  Any “worth-a-bonus” regulator from the industry is likely to be connected, on average, by less than 3 steps to any banker.  So the best golfing buddy of one will know the best golfing buddy of the other.  They’ll deny it affects their judgment, but as a psychologist I’d say that their denial is about as realistic as their chance of controlling big bonuses with the current system.

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