Made in Holland. Beginning of a trend?
Capitalism is the best system for enlisting the smartest minds to problems where the most money can be won. Although this is not entirely without problems (it’s why there is little research in curing third-world diseases, as there isn’t a whole lot of money to be made there, for instance), generally it works beautifully.
But there are times when the system gets usurped for non-productive ends altogether, the most glaring example is how the financial industry, rather than a means, became and end in itself, and (not unimportantly) for itself.
It got the best and the brightest shifting dodgy mortgages on an ususpecting public, then repackaging them into purposely overly complex toxic financial instruments of mass destruction shifting them out of the backdoor to the lemmings in the financial industry (stamped triple A by captured ratings agencies), all the while making sure that billions were kept in-house as earnings and bonuses.
All added and abated by politicians who, at best, bought into the financial deregulation nonsense or felt compelled to do so in an international race to the bottom, and at worst were so dependent on financial companies for campaign contributions that they were basically in their pockets. Not to mention the regulators looking the other way, or looking actively at the companies they were supposed to regulate but eying future job prospects instead, caught between those ever revolving doors.
When the music stopped, the banks had to be bailed out to keep us all from a repeat of the great depression, but this has only reinforced the moral hazard problem that is partly to blame for the rampant speculation and over-leverage in the financial sector in the first place.
There were solutions (like the Swedish temporary nationalization model that could have punished the guilty, thereby reducing moral hazard, rewrite bank policies and charters and de-nationalize them at a profit for the taxpayer later on) but that route wasn’t embarked on.
And now it seems almost back to normal. Almost.
One of the big mysteries is why there wasn’t a bigger backlash against the financial industry that, instead of financing entrepreneurs with promising ideas or productive companies and sniffing out credit risk, turned into a casino and shifted repackaged risk of the balance sheet as fast as it could in order to take on yet more. The product didn’t matter, it’s the process that generated the fat bonuses and earnings.
But now, something of a backlash seems to have arisen, at last, and it has chalked up it’s first success in, out of all places, our native The Netherlands.
Dutch bankers’ bonuses axed by people power
Richard Wachman in Amsterdam
The Observer, Sunday 27 March 2011
An online campaign has overturned ING’s executive pay policy, and the mood in Amsterdam is getting increasingly militant about bonuses at bailed-out banks
Britain has a rival when it comes to bashing bankers. After a furious row over pay packages at Amsterdam-based ING in which thousands of customers threatened to make mass withdrawals, the Netherlands is now vying for the title of Europe‘s most bonus-hating country.
A growing Dutch political storm could end with a blanket ban on bonuses to financiers who work for institutions bailed out by the taxpayer.
ING customers mobilised on Twitter and other social networks to protest at bonuses paid to bosses at the bank, one of the biggest in the country. The threat of direct action raised the spectre of a partial run on ING, terrifying the Dutch establishment. Fred Polhout, union organiser at the bank, says: “People were outraged. We heard about the bloated sums being paid again in the City and in New York; but suddenly the issue exploded on our own front door.”
Compared with the packages awarded to bankers in the US and UK, the Dutch bonuses were small potatoes. Jan Hommen, ING’s chief executive, was due to receive a £1m bonus – a pittance when you consider that Stephen Hester, head of state-controlled RBS in the UK, is in line for up to £7.7m, Bob Diamond of Barclays is to collect as much as £6.5m, and some senior bankers at Goldman Sachs and JP Morgan are looking at windfalls of about £40m each.
“Perhaps we are so upset because we are a small country that prefers to set an example, rather than follow others,” suggests Polhout.
So severe was the public reaction to Hommen’s bonus that within days he had agreed to waive the award and told other ING directors to do the same.
Now the Netherlands is going through a painful period of introspection and soul-searching. Politicians have voted to implement a 100% retrospective tax on all bonuses paid to executives at institutions that received state aid as a result of the financial crisis. In other words, no banker should get a bonus until the debt is cleared, and they should return payments made since 2008.
ING was thrown a €10bn (£8.7bn) lifeline to stop it going under, while ABN Amro was nationalised. Numerous other Dutch financial firms received capital support, including Aegon, SNS Reaal and ASR Nederland.
On the streets of Amsterdam, there is little sympathy for the bankers. Emma Rohl, who works at an English bookshop in the city centre, says: “They shouldn’t get bonuses at all. Why should people be paid vast sums for going into work and doing their jobs? It’s utterly ridiculous.”
Erick Koenig at a nearby restaurant says: “We rescued the banks from their own follies, and now they expect to be paid extra. I think they should work for free for at least five years.”
At a dusty office in a northern suburb of Amsterdam, Henk van der Kolk, head of the country’s biggest trade union, FNV Bondgenoten, does nothing to conceal his frustration: “Everybody is angry about what happened at ING. The board isn’t in tune with public opinion. What were they thinking of? ING pensioners have seen their payouts frozen, while many employees were awarded a pay increase of just 1%.”
Van der Kolk’s union is pushing for a law that would ensure that executive pay should never amount to more than 20 times the wage paid to the lowest-salaried employee. As for bonuses, the union feels payouts should not exceed 50% of a director’s salary. Hommen’s bonus was worth 92% of his €1.35m package.
“Remuneration for bankers was linked to financial machismo, which encouraged irresponsible lending. We want to get away from the bonus culture,” says van der Kolk.
But given the payouts to ING directors were relatively small, some Dutch bankers are shocked they have received another public mauling.
One ING insider suggests the country was in the grip of a “typically Dutch Lutheran and Calvinist backlash” which cultivates the view that excessive wealth is somehow morally reprehensible and in contravention of traditional Dutch, Christian values. The source says: “We went through this during the boom when ministers railed against stock options and bankers were accused of exhibitionism, and enriching themselves to the detriment of the nation.”
The bankers’ response that high remuneration is vital to retain talent and prevent Dutch financiers from defecting to overseas banks is given short shrift by Polhout. He says: “Let them go abroad if they don’t like it her;, there are plenty of clever people who will take their place and work for less. Good riddance, as far as I am concerned.”
Moderate opinion in Holland seems united in its belief that banks which received state aid should not be shelling out bonuses. And Dutch parliamentarians are saying the same thing, demanding the government take immediate action. ING may have made a net profit last year of more than €3bn, but it still owes the taxpayer €5bn.
The uproar against Hommen’s bonuses and those earmarked for the bank’s senior executives have forced ING to rethink its position. Hommen promises no more bonuses till 2012/13 when the bank expects to have repaid all state aid. In a letter to Dutch newspaper De Volkskrant, he said: “We have underestimated the signal we sent to society. [We] have [risked] renewed damage to the recovering trust of our customers.”
Few doubt a critical factor behind ING’s volte face was the boycott threatened by consumers.
A spokesman for the bank admitted the payment of bonuses “prompted a reaction from our customers via emails and telephone messages to our call centres”. But he said only a few hundred people had actually closed their accounts.
Now the ball is in the court of finance minister Jan Kees de Jager, who must decide how to respond to a proposal by parliament calling for the return of bonuses by all executives at state-supported banks. On a recent television show, he said such a law would be difficult to implement and would hit bankers on average salaries who receive bonuses of just a few thousand euros. But in today’s highly charged political atmosphere, de Jager knows that doing nothing is probably not an option.
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We have nothing against people making oozes of money, as long as they add, not detract to GDP (we’ve applauded people like Vinod Khosla here). We welcome anything that reduces, in however small way, the moral hazard problem (bankers speculating with other people’s money in situations where the private benefits and cost are way out of line with the social benefits and cost). This had to happen somewhere. The interesting question is; will it spread?