Stephen Hester just doesn’t get it

By Ian Fraser

Published: Daily Record

Date: March 1st, 2013

Stephen HesterRoyal Bank of Scotland boss Stephen Hester was yesterday touring the television studios trying to convince us that he is absolutely determined to make RBS into a “really good bank” once again. The fox-hunting laird of Gogarburn also told us that RBS staff will share a bonus pool of £607 million, over and above their already generous pay and benefits packages, for all the hard work they put in during 2012.

Hester just doesn’t get it. If the crisis taught us anything, it is that bonuses drive traders to take outrageous risks and to bend the rules. And they drive retail banking staff to mis-sell. Last month, RBS began to pay the price, when it was fined £381 million by the US Justice Department and regulators on both sides of the Atlantic after it was found to have been part of a criminal conspiracy of global banks that sought to rig the key Libor interest rate. The fallout from that five-year crime spree, which continued for longer under Hester’s stewardship than it did under his predecessor Fred Goodwin, is far from over. A tsusami of litigation awaits, and the bank admitted on Thursday that it faces additional financial penalties for rigging Libor, which “may be material”.

RBS, which also owns NatWest and Ulster Bank, caused massive inconvenience to millions of its United Kingdom customers last summer when its systems failed and it may still face further financial penalties for that. The bank, founded in 1727, continues to treat many of its small and medium-sized enterprise customers with barely disguised contempt, stonewalling complaints even when it is quite clearly in the wrong, and inviting cheated customers to sue rather than ever admitting to its mistakes. There is also growing evidence to suggest that the Edinburgh-based bank has developed a system of using so-called “manufactured defaults” in order to strip targeted small and medium-sized customer firms of their assets. In a related development, the bank is being investigated by both the City of London Police and Tayside Police over the alleged misappropriation of hotels by its distressed assets arm. The bank also seems to have lost the support of investors, many of whom have joined a legal action in London’s High Court to sue the bank for between £4 billion and £12 billion after it allegedly duped them into putting money into a rights issue during 2008.

In the circumstances, paying staff £607,000,000 in bonuses seems unwise, especially when you consider the bank remains heavily loss-making. Admittedly, less than half of the bonus pot is going to investment bankers in the City of London and the other financial capitals around in which the rapidly shrinking Edinburgh-based institution still operates. In total, only £215 million went to the erstwhile ‘masters of the universe’ inside RBS’s so-called ‘casino’ bank. These are the sort of people who, experience tells us, have few qualms about rigging a benchmark interest rate to profit at customers’ expense — if they can get away with it and make a bonus out of it. And that customer may well be your pension fund.

Overall RBS has been loss-making for the past five years, and has racked up losses of £36 billion since Fred Goodwin was shown the door and we bailed it out in 2008-09. The chances of it being re-privatised at a profit in the foreseeable future seem minimal. It desperately needs money to strengthen its capital base. So why does the bank believe it is appropriate to pay any bonuses at all? Hester said quality staff are “badly needed” to help turn the bank around. “We are accomplishing a lot for this country from a very big mess, this country should want good, motivated people to do it.” But the ‘talent’ who drove the bank into the ground thanks to reckless risk-taking and the accumulation of largely toxic assets prior to October 2008 were also handsomely rewarded. The bonuses didn’t seem to enhance their judgement did they?

The bonuses that Hester insists on paying out have nothing to do with rewarding entrepreneurship or skill. The main reason that bankers expect such bonuses is because their industry remains an oligopolistic cartel whose primary focus is the extraction of ‘economic rent’ from the real economy. Successful banks which appear to have aligned their own interests with those of their customers, including Sweden’s Handelsbanken, do not pay bonuses at all. I believe that Hester would be much better advised to unilaterally tell all RBS’s 135,000 remaining staff that no bonuses will be paid – full stop – in 2013, but that he is instituting a John Lewis style profit share. He would probably find that the more dedicated and competent staff would stay and that those who are only in it for themselves would go. Maybe his damaged institution might recover more quickly too.

Financial journalist Ian Fraser blogs at www.ianfraser.org, and is currently writing a book about RBS which is to be published by Birlinn. [An edited version of this opinion piece was published on page 11 of the Daily Record on Friday, 1 March 2013]. 

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