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Excessive pay fuels City gambling, says Mervyn King
Gary Duncan, Economics Editor 
February 27, 2009

 
The Governor of the Bank of England has attacked the “astronomic” pay enjoyed by top bankers for creating a culture of reckless gambling in the City, but stopped short of condemning Sir Fred Goodwin’s generous pension.

Mervyn King spurned pressure from MPs to speak out against the pension of £650,000 a year that is being drawn by the disgraced former chief executive of the part-nationalised Royal Bank of Scotland.

He said that he did not want to “jump on the bandwagon of a rather unappealing sort of vengeance” aimed at individual bank bosses.

However, he laid into the City’s multimillion-pound bonuses and said that the “vast amounts of money” being paid to corporate executives were very hard to justify..

“The real question is how was it the case that everyone thought that it was a good idea that executives should be rewarded in this way,” he said. “It was a form of compensation which rewarded gamblers if they won the gamble, but there was no loss if they lost it. It’s obvious that if you do that you will give people incentives to gamble.” Mr King condemned a wider culture that he claimed made it “massively difficult” for regulators to challenge excessive risk-taking without being accused of being unpatriotic in attacking the City.

He said: “They would have been seen as arguing against success. The Government would have been lobbied. It would have been a lonely job.The lesson I would draw is not to expect too much from the regulators. It’s very hard to say to someone who appears to be very successful that what you are doing is potentially damaging to the rest of the economy.”

The remarks came as Mr King sought to deflect charges from MPs on the Commons Treasury Committee that the Bank had been “running behind events” in the crisis.

He pinned much of the blame for events on financial regulators, which he said were ill equipped. But he also took a swipe at Gordon Brown, suggesting that excessive government borrowing before the recession had left it badly boxed in now and having to use tax and spending measures to combat the slump.

Mr King said that the scale of government debts had been an issue. “We entered this crisis with levels of borrowing which were too high and that made it difficult,” he said.

Mr King insisted, though, that it was “wild exaggeration” to suggest that a surge in public borrowing and debt to fund bank bailouts and shore up the economy meant that Britain could go bust. “We will come through this,” he said. “There have been downturns and financial crises in the past. It won’t go on for ever. It will be painful, but we will come through it.”

With the Bank preparing to launch radical measures next week to jump-start the economy through quantitative easing, or “printing money”, the Governor played down worries that this could eventually stoke inflation. “We are not going to allow a great inflationary surge,” he said.

As the Treasury unveiled moves to guarantee “toxic assets” clogging the flow of bank lending, Mr King admitted that the full scale of support for banks could burgeon. “How much capital banks will need in the end is impossible to tell. We should have a detailed, asset-by-asset audit. Only then can the Government work out how much the taxpayer should pay.”

He called for the Bank of England to be given additional powers to demand information from banks.

— Gordon Brown and Alistair Darling have been running a “reckless” fiscal policy that will lead to sharp tax rises and swingeing public cuts after the next election, the head of a leading public finance watchdog says in The Times today.

Steve Bundred, chief executive of the Audit Commission, says that the nation’s financial situation means that any public servant who does not believe that there will be spending cuts in two years’ time is living in “cloud-cuckoo land”.