Global wealth imbalance, a reason for worry

Ordinary people everywhere are showing their discontent over a system which makes the rich and the elite ever more richer while the poor worse off.

For those who think that Occupy Wall Street, the indignados in Spain, the World Social Forum and the hundreds manifestation of protest worldwide are expressions without concrete outcome, the result of the recent Swiss referendum (March 3, 2013) on capping the salaries and bonuses of banks executives should make them think twice.

Like it or not, two-thirds of the Swiss, who are not exactly a revolutionary people, have given the shareholders of financial institutions the right to decide salaries and bonuses of their executives, which is thus no longer to the cosy mutual enrichment of their boards, and another referendum is due shortly on limiting the salaries and bonuses of executives of companies of all sectors to a figure that does not exceed 15 times that of the average salary of their employees.

Towards the end of February, the European Union took a major step towards capping the bonuses paid to bankers at no more than equal to their annual salaries, starting next year. Only if a bank's shareholders so decided could a bonus be higher, and even then it would be limited to no more than double the salary.

These are interesting developments if one considers that back in 1950, US financial manager Bernard Baruch theorised on the possibility that executive could have salaries 50 times higher than that of the average of their employees, giving rise to a huge scandal - today, according to the Fortune 500 list of the most important companies, that difference has grown to 545 times. The howling of bankers, while expected, is very interesting from the point of view of the reason for their rejection.

The first, basically from the United Kingdom, is that such limits would increase the gap between London and Europe. The financial sectors account for 10% of the British gross national product (GNP), and the Anglo-Saxon world has been riding the waves of increases in the bonuses and salaries of bankers much more than elsewhere - in a good year, a bonus can be 10 times higher than a salary.

As the last local elections showed, the United Kingdom is anyhow moving towards an increasing anti-European sentiment, and Europe will never become more integrated with the brakes that London continues to apply. So the financial sector is not the main issue. The second reason for rejection is more interesting. It is argued that the result will be higher fixed salaries which would hurt more shareholders, and high bonuses which are more flexible.

The result would be that good executives would move to Wall Street, or Hong Kong, Shanghai or Tokyo, and Europe would be left with second-class executives.

Meanwhile, it is widely known that high bonuses reward risk-taking, which is one of the causes of the dismal performances of the banking system, and this argument ignores that there is a growing consensus on the need to go back to the pre-Clinton era, when deposit banks and investment banks were separate (and there was not such a dramatic crisis as at present) precisely in order to reduce the high-risk culture which has led to a system that has increased unemployment and poverty worldwide - suffice it to note the unremitting cascades of fines for frauds and mismanagement that banks have had to pay since the ill-fated Clinton decision to repeal the Bank Holding Company Act paving the way for the creation of mammoth ‘too big to fail’ banks that played a role in encouraging reckless risk-taking.

‘Claw-backs’

The third argument is the most interesting, and show how much the world of banking has grown into its own delusion. Bonuses are mostly given in the form of a “claw-back bonus”; they are deferred and often paid in the form of stocks, and they can be retracted.

The big banks, like the Royal Bank of Scotland and Barclays, have used claw-backs, and bankers say that this threat has itself become a powerful deterrent to risky or unethical behaviour.

No data are available on how much this claw-back mechanism has been used anywhere, but what is known is the innumerable amount of fines that have been applied to the big banks for fraud - the very lenient US regulators alone have imposed more than $3 billion in fines on the big banks.

Let us just recall some of what are considered by the experts as a “slap on the wrist”: 8.5 billion for fraudulent foreclosures on home loans imposed ten banks (including Bank of America, Citigroup and JP Morgan Chase), followed by a $557 million settlement involving Goldman Sachs and Morgan Stanley.

To date, fraudulent fixing of the Libor rate (the rate of exchange among banks) has cost just the UBS $1.5 billion.

The chief executive of Barclays has been obliged to resign. Where is the effect of the claw-back cause as a firewall against risky and unethical behaviour? British authorities have now recommended regular oversight of Libor, as well criminal charges against individuals trying to alter the rate for financial gain. HSBC has recognised that it has been laundering money from the drug cartels of Mexico and Saudi banks with ties to terrorists groups.

- Third World Network Features