Will The G20 Regulate Bank Bonuses?

Until several years ago, when average Americans heard about gigantic banker bonuses, they just shrugged and mumbled, "Wow. Must be nice." Ever since the financial crisis that shrug and mumble has turned into a clenched fish and red-faced yell, "Those crooks!" But that wasn't just the reaction in the U.S.: the anger was global.

That led to the "Group of 20" (G20) nations to agree to find ways to reduce banker bonuses last April. Since that time, some member nations have taken steps to bring down bonuses, while others have been hesitant. Will the G20 set out any global bonus rules later this month when they meet again?

Both the Wall Street Journal and New York Times have articles on this topic today. They don't seem to entirely agree. The Journal says that Europe is still angry; the Times says bonus regulation efforts might be waning. But let's start with some of what has actually been done thus far regarding bonus limits, via the Times:

Yet action on those goals has been patchy. France and Germany have laid down relatively strict rules governing remuneration, while Britain and the United States have shown less vigor, experts say.

Just what kind of limitations are we talking about? Here's what the Times piece says France's President Sarkozy would like:

Last week, President Nicolas Sarkozy called on the G-20 to consider caps on the total bonus pools of banks and individual bonuses, and to cease working with those institutions that did not agree. He had just persuaded French banks to stretch two-thirds of their bonuses over three years and give a third in shares.

Here's an amusing bit about what Britain's Prime Minister Brown might like to see:

In an interview published Monday in The Financial Times, Prime Minister Gordon Brown of Britain said that bonuses should be based on long-term success, that banks should "claw back" rewards if performance suffered subsequently and that regulators should be able to impose higher capital requirements on firms.


But Mr. Brown was unenthusiastic about a mandatory cap on bonuses, warning it would be difficult to enforce.

Right -- because clawing back money that's already been paid is so much easier than setting preemptive caps. In any case, such talk doesn't exactly support the Times' claim that Great Britain is necessarily against bonus regulation.

The Wall Street Journal explains why curbing banker bonuses might be a good idea, beyond just hatred of the wealthy:

Several EU policy makers say their efforts to curb bankers' pay aren't vindictive, but are designed to reduce excessive risk-taking.

"Member states in the EU should follow guidelines from our recommendations in April," said European Commissioner for Economic and Monetary Affairs Joaquin Almunia.

Those guidelines call for a better alignment of pay incentives to ensure bankers don't take huge risks with the hope of scoring a large year-end bonus.

The Times adds:

Most analysts agree that for codes on pay to be effective, similar rules need to be enacted by all major economies. Some governments see their own role as limited; others are wary of losing investment to neighbors.

The idea is that if only a few countries jump on the bonus curbing bandwagon, it won't matter much. The talented bankers will just flee to banks based in nations who allow bonus schemes. Those nations will, consequently, become financial capitals. Business would proceed as usual. At least that's what conventional logic would say.

Could conventional logic be wrong? Maybe. If large banker bonuses truly are dangerous, then I would assert that it shouldn't matter if all countries are on board. Those countries who allow risky bonus schemes will end up getting bitten and their financial systems will be far riskier than the nations with curbs. As a result, the global market should naturally weed out those nations if that risk is real.

I kind of doubt that will happen, however. I'm mostly cynical to such an outcome for two reasons. First, I don't think, ultimately, people really care that much about banker bonuses. The only reason they do now is because there was a financial crisis. Once things get better, most of that anger dissipates. That's what we're seeing in the U.S., where universal bonus squashing legislation seems less and less likely with each day that passes.

Second, I'm not convinced that bonuses had all that much to do with the crisis. Wall Street types will always be out to make profit, short- or long-term. The bonus culture isn't what caused the financial crisis: it was a culmination of factors like easy credit, irrational real estate expectations, overleveraged banks, etc. I don't honestly believe that most of the bankers who created or purchased what we now refer to as "toxic securities" really thought they were long-term losers -- and certainly not to the extent most people do now. After all, many of these securities were initially granted high ratings.

So what does this mean for the G20? Probably that, at most, there will be some more fluffy language that they all agree to, like in April. They'll probably all concur that long-term profit should be the goal, not short-term gain. But exact ways to do so, like caps, won't enter the picture. Besides, if the U.S. and Great Britain aren't on board, such a measure has virtually no chance of mattering. Those two nations aren't exactly going to be shut out of the G20 if they fail to comply.