Backlash on bank bonuses now reaching the highest political levels

Exclusive analysis for FinReg21 by Darrell Delamaide

What may be only the beginnings of a high-level political backlash against the banking industry gained some momentum this week.

While there has been a constant groundswell of populist rage against the banks since the beginning of the crisis, the industry has been insulated from the impact by political leaders more intent on restoring financial stability.

Now that stability has returned, however, politicians are showing more signs of acknowledging the anger in the voting public, especially in the absence of any notable signs of contrition or moderation from the banking industry.

The UK’s Labour Party government said it will slap a one-time 50-percent tax on bank bonuses above £25,000 (about $40,000) – which is chump change for many of the high rollers in the industry. The tax affects all banks, whether they received government aid or not, including U.S. subsidiaries in the UK.

Labour is down in the polls and this obviously political move is designed to improve their standing going into next year’s national election. But even the business-friendly Conservative Party is supporting the tax.

U.S. commentators were quick to say that this country is not likely to impose such a tax on bonuses, even though the same reasoning applies here. The renewed profits in the banking industry are due largely to near-zero interest rates and other government subsidies – not to the skill and acumen of those receiving the bonuses.A banking industry just thrown on the ropes by billions in losses should be rebuilding capital rather than paying out bonuses.

What draws the political fire, though, is that those largely perceived as having created a crisis that has plunged the industrial countries into double-digit unemployment are reaping a personal reward from this taxpayer-supported windfall.

The Wall Street Journal reported that pay czar Kenneth Feinberg is ready to impose a second round of pay caps on companies receiving government aid. The spectacle of banks arguing with regulators about how much capital they need so that they can return government aid and avoid the pay caps is not endearing them to the public or to many politicians.

Former Federal Reserve chairman Paul Volcker threw some cold water on a cozy financial conference in England this week by scolding bankers on the subject of pay.

“Has there been one financial leader to say this is really excessive?” Volcker, now an advisor to the Obama administration, told the group of bankers, according to the Times of London. “Wake up, gentlemen. Your response, I can only say, has been inadequate.”

The pay issue will not go away, and reports of year-end bonuses are likely to fuel the flame even more.

The head of the congressional panel that has been charged with investigating the financial crisis said that the big profits banks have made as a result of an infusion of taxpayer money are going to be part of the panel’s investigation.

“This dichotomy of record profits and bonuses on Wall Street while you have real unemployment of 15 percent-plus in this country is very striking,” Phil Angelides, chairman of the Financial Crisis Inquiry Commission, told The Huffington Post.

“From a personal viewpoint, this disconnect between how Americans are faring and what’s happening on Wall Street with respect to bonuses is extraordinarily disconcerting,” said Angelides, a former state treasurer in California. “I'm not running those businesses, but the bonuses are offensive to me and to a broad segment of the American public.”

The argument that reducing bankers’ pay will prompt them to go elsewhere is wearing a bit thin when all the public wants to do is to tell them to go to – a hot place far away. The uproar in the UK banking industry over the proposed bonus tax was full of such threats about damage to London as a financial center, but that won’t stop the tax from being imposed.

President Obama is supposed to speak again to executives from the top U.S. banks next week, primarily to urge them to do more to increase lending to small businesses and consumers.

Bankers complain that regulators are insisting on higher capital ratios and that has put the brakes on lending. But as the Congressional Oversight Panel chaired by Elizabeth Warren noted in its latest report this week on the Troubled Asset Relief Program, the failure to remove toxic assets from bank balance sheets – the original purpose of TARP – is what’s holding back lending.

Obama reportedly will also raise the bonus issue with the banking chiefs. His own standing in the polls is down and unemployment remains very sensitive in spite of the encouraging November figures.

In any case, it would be foolish for bank executives to ignore the signs of a growing backlash, one that has now reached the highest political circles.