Seeing red over ‘Fred the Shred’
Incapable of having an honest debate about the economy, New Labour witch-hunts bankers instead. PLUS: Sean Collins on the politics of pay.
Here, Rob Lyons says the witch-hunting of Fred Goodwin might exacerbate our economic problems. Further below, Sean Collins asks why Barack Obama is politicising the pay packets of CEOs.
‘Many of the bank executives who got banks into this mess have now left their jobs; the boards of failed banks have gone; the four most senior executives of HBOS and RBS have all now left their jobs; seven non-executive directors of RBS lost their jobs; the HBOS board has ceased to exist. And we are exploring all the legal action necessary to recover pension payments from people who received too much.’ (1)
It is clear from these comments, made by UK prime minister Gordon Brown at a Labour Party policy forum last week, who the British government blames for the ‘mess’ of the economic crisis: the top brass at the banks. And now the issue of one man’s pension – that of Sir Fred Goodwin, former boss of RBS – has come to dominate political debate in the UK. At best, this discussion is a pointless and cynical distraction from the task of stabilising the banking system. At worst, it may exacerbate our economic problems.
The Goodwin saga started back in October last year. As a condition of the government bailing out RBS, Goodwin – nicknamed ‘Fred the Shred’ for his staff-cutting measures in the past – resigned as chief executive. Indeed, the government was desperate for as many of the executives of the bailed-out banks to be forced out as quickly as possible. At the time, Goodwin was clear that the mood was such that to take everything he was entitled to under his contract would be viewed extremely negatively. So, as part of his resignation deal, he waived a year’s salary plus some share entitlements, amounting to a combined sum of over £1million. At the time, as Goodwin pointed out in a letter to the City minister Lord Myners last week, this was deemed to be ‘both an appropriate and sufficient recognition of the circumstances’ (2).
Last Wednesday, everybody’s favourite gossip columnist, BBC business editor Robert Peston, revealed Goodwin’s pension arrangements. It turns out that he now has a pot of £16million to draw from, allowing him to have a pension of £650,000 per year from the tender age of 50 (3). A storm of controversy followed, with the government eventually demanding that Goodwin waive some or all of his pension. It turns out that the government knew from the outset that he would be getting the money, though it appears that it may have believed the pension was a cast-iron contractual entitlement; in fact, it seems that some of this handsome annuity fund was at the discretion of RBS.
Is it really a surprise when you’re trying to get someone out of his job in a hurry that things get waved through that might not, on reflection, seem such a good idea? But rather than confess that it presided over a bad deal, the government has foolishly tried to backtrack on it.
Brown had already been fulminating about trying to ‘claw back’ excessive banking bonuses by changing the law to tie bonuses to long-term profits. By last Sunday, Labour’s deputy leader, Harriet Harman, was in full cry. When asked by the BBC’s Andrew Marr if the government would consider legislating to get the money back, Harman said: ‘It might be enforceable in a court of law, this [pension contract], but it is not enforceable in the court of public opinion, and that is where the government steps in. Sir Fred Goodwin should not count on being £650,000 a year better off, because it is not going to happen.’ (4) Many people took that as a sign that new legislation might indeed be forthcoming.
In response, even Brown balked at the idea of making laws to spite one person. It is, indeed, a terrible idea, turning the law into an arbitrary instrument for the persecution of individuals. As the former rail regulator, Tom Winsor, asks in The Times (London) today: ‘Are the word of the state, the sanctity of contract and the rule of law really worth so little that they should be undermined in this way to pursue a political vendetta?’ (5) Goodwin has already been made a scapegoat once already – to some extent, deservedly. It seems the government can’t resist trying to make him a scapegoat for a second time.
It is true that, compared with the salaries of nurses, teachers and others, the very large salaries and benefits paid to top bank staff seem incredible. Goodwin’s pension, for example, is about 25 times the median take-home pay in the UK. The fact that these people were instrumental in bringing a number of too-big-to-fail financial institutions to their knees makes these wages all the more galling. But are they really any more galling than American investment tycoon Warren Buffett’s billions, made by shuffling bits of paper around? Or Bill Gates’ monopoly profits from creating the world’s most widely used computer software? Indeed, are top bankers’ salaries any more galling than the substantial pension that Brown will receive when he leaves office having presided over potentially the worst recession in decades (not to mention being a 10-year champion of New Labour authoritarianism and warmongering)?
Elements of the government have now instituted an anti-banker witch-hunt, with Goodwin as their prime, evil target – and this is a witch-hunt created to satisfy the banker-bashing Westminster village and commentariat, rather than any groundswell of anger over bankers’ salaries. The legal affairs correspondent of the Guardian asked in January whether allowing Goodwin to retire with a knighthood and a generous pension could ‘really amount to a punishment proportionate with the nature of the offence: presiding over the biggest-ever loss ever in British corporate history ‘ (6). John Prescott – the former deputy prime minister most famous for shagging his secretary, and with a £1.5million pension pot of his own – is now shamelessly leading a campaign against bankers’ bonuses. Most people find the bankers’ remuneration annoying, but there is no popular campaign to recoup this money; and now many ‘ordinary punters’ are understandably asking: ‘Well, why does Prescott have a fat pension, too?’
As Anthony Hilton pointed out in the London Evening Standard yesterday, ‘outrageous though the Goodwin pension is, there are more important things to worry about: we should stop behaving like passengers on the Titanic in a fury because the captain of the vessel has been spotted taking a free drink from the bar. The brutal truth is that when the complaints about Sir Fred die away, our economic problems will remain. They will have been made no better for all the time spent trying to get his pension off him.’ (7)
Indeed, this furore could make things worse. Hilton argues that if people become completely cynical about the banking system, then the much-craved stability will never be achieved. Anatole Kaletsky made a similar point in The Times yesterday: if the government puts off taking important steps to stabilise the banks because its own spin has generated antipathy towards bankers, then we might all be worse off in the long run, Kaletsky suggested (8).
The Downing Street and Fleet Street-generated controversy over Goodwin, who was previously close to the New Labour government, is utterly opportunistic. As Hilton puts it: ‘Such stunts seem part of the web and weave of the prime minister’s style, along with that inability to distinguish between activity and action, which fuels his compulsion to announce a new initiative every week but to follow none of them through.’ (9) In the meantime, members of Brown’s government – with Harman the most public example – seem to be more concerned with jostling for position in readiness for the time when the axe falls on the prime minister, rather than devoting their energies to solving, or even honestly discussing, the economic crisis.
The British economy has been in intensive care for years, propped up by public spending and financial services built on cheap, easy credit and risky investments. Gordon Brown was only too happy in the recent past to trumpet these short-term fixes in order to keep things ticking over as ‘the end of Tory boom and bust’ – and to take credit for them. Now they have run out of steam, with disastrous results, so should we expect Brown, too, to forego his pension for his economic failings? In June 2004, Brown said ‘it is sometimes forgotten that bonuses are a big source of extra income tax’ – now he says ‘we are leading the world in sweeping away the old short-term bonus culture of the past’ (10). The Fred the Shred affair has revealed that Goodwin is like any other banker: self-interested and irritatingly wealthy. More fundamentally it has exposed the government as opportunistic, populist, cynical, deeply divided, authoritarian and in disarray, far more interested in discussing retrospective laws to punish ‘evil’ bankers than in having an open and honest discussion about the state of the economy.
Rob Lyons is deputy editor of spiked.
by Sean Collins
Politicians’ complaints about bankers’ pay can be heard in the US, too, where President Barack Obama and fellow Democrats have introduced new limits on bankers’ compensation.
In early February, Obama announced regulations on executive pay at firms that will accept government financial assistance in the future. The Obama plan, ‘the most aggressive assault on executive pay by federal officials’ according to the Wall Street Journal, includes a salary cap of $500,000 for top executives (although there is no limit on payments in shares, which executives must hold until government funding is re-paid).
Not satisfied with the Obama plan, Democrats in congress then added their own, stricter limits on top pay in the economic stimulus bill that Obama signed in mid-February. The bill’s provisions impact on all recipients of the financial rescue programme known as TARP (Troubled Asset Relief Programme), and affect up to the 25 highest-paid executives. The new rules restrict bonuses to no more than a third of total compensation, ban ‘golden parachutes’ (severance payments), and limit ‘excessive expenditures’, including entertainment, the use of corporate jets and office renovations, amongst other things.
The new limits on pay have received near-universal support in the political class. The Democrats are united in support, and most of the Republicans – said to be the representatives of business and the free market – back the limits, too. John Boehner, Republican minority leader of the House, says: ‘If anyone is looking for the taxpayer to bail their company out, these types of executive pay caps are appropriate.’ Only the fringes are in opposition, like conservative commentator Sean Hannity, who said the new restrictions are ‘a dramatic move away from capitalism and towards socialism’.
The Obama administration and its allies in congress say they have introduced the new pay limits in response to public uproar. ‘What gets people upset – and rightfully so – are executives being rewarded for failure, especially when those rewards are subsidised by US taxpayers’, said Obama. Christopher Dodd, the Democrat Senator who drafted the provisions in the stimulus bill, adds: ‘The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence in efforts to stabilise the economy.’
Obama, Dodd and others are referring to media stories of executive excess in banks that received government support, such as ex-Merrill Lynch CEO John Thain’s million-dollar office renovation, Citgroup’s plan to buy a $42million jet, and Wells Fargo’s cancelled plans to host a conference in Las Vegas. New York Attorney General Andrew Cuomo is now investigating Thain’s decision to pay billions in bonuses before Bank of America’s takeover of Merrill Lynch was formally completed.
But it is hard to see visible signs of mass anger towards bankers. Yes, many people, when asked, say they do not agree with certain pay practices in government-supported companies, but there are no vocal protests and it is not a major topic of conversation. In this time of recession and uncertainty, most people are focused on preserving their livelihoods. They are giving the Obama administration carte blanche to do almost anything in the hope that the White House will sort out the economy and speed the recovery. It is more the case that Obama and other politicians feel defensive and out-of-touch, and they hope that by attacking the bankers they will gain some public support. Dodd charges Wall Street’s lavish bonuses with undermining public confidence, but right now Obama and Congress’s own lack of action regarding the insolvent banks is a much bigger reason why people are uncertain and unconfident.
Some have noted that the Obama and stimulus bill provisions contain numerous loopholes and other technical problems, but they miss the point: these measures are not really about controlling how executives are paid, they about appearing to be doing something about ‘public furore’. American politicians are grandstanding in order to draw attention from the fact that they, too, are complicit in the economic mess. And it is certainly easier for them to rant on about high pay than to deal with the recession – which the bankers did not singlehandedly create, and which will not be improved one iota by the new restrictions on pay.
Sean Collins is a writer based in New York.
It takes more than money to revive the economy, by Sean Collins
Why rate cuts stir so little interest, by Mick Hume
The Crisis With No Name, by Frank Furedi
The ‘credit crunch’ and the SAD economy, by Phil Mullan
The state won’t be the saviour of the economy, by Frank Furedi
This Marxist isn’t laughing, by Brendan O’Neill
Against austerity, by Brendan O’Neill
There Is (still) No Alternative, by Mick Hume
Congress bales out, by Brendan O’Neill
I don’t predict a riot, by Mick Hume
Bashing the bankers can make you go blind, by Rob Lyons
It’s the politics, stupid, by Phil Mullan
Lehman Brothers: when confidence runs out, by Rob Lyons
Five myths about the Wall Street crisis, by Daniel Ben-Ami
Read more at spiked issue: Financial Crisis.
(1) Gordon Brown attacks ‘indefensible’ bank practices, Guardian, 28 February 2009
(2) The exchange of letters between Sir Fred Goodwin and Lord Myners, The Times, 26 February 2009
(3) Fred Goodwin to receive £650,000 for life, BBC News, 25 February 2009
(4) Harman warning on Goodwin pension, BBC News, 1 March 2009
(5) Government by vendetta? I remember it well, The Times, 3 March 2009
(6) Should Sir Fred get away scot-free?, Guardian, 20 January 2009
(7) Never mind Sir Fred’s pension, how is Gordon going to save us now?, London Evening Standard, 2 March 2009
(8) The longer Lloyds is left, the worse things will get, The Times, 2 March 2009
(9) Never mind Sir Fred’s pension, how is Gordon going to save us now?, London Evening Standard, 2 March 2009
(10) See ‘Bonus Balls’, Private Eye, 6-19 March 2009
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