Tuesday, 8 March 2011

Maybe Ben Goldacre should stick to science?


I got into an exchange with the sainted Ben Goldacre regarding a tweet he sent about the paying of bonuses to Barclays Bank employees (and one presumes specifically the multi-million pound package of bonuses for the bank’s Chief Executive, Bob Diamond):

bored of ppl tweeting that because barclays benefited from the taxpayer bailout, but didn't specifically receive bailout money into its own accounts, its ok for them to pay £m bonuses. anyone written a piece on why this is obviously a stupid argument, to save me the bother?

It’s a tweet so I won’t criticise the grammar but it seems to me a disappointing argument from someone who puts so much faith in evidence-based assessment of science. It seems to me that Ben needs to apply the same discipline to his analysis of business and economics.

There are three specific observations in this comment:

1.       Did Barclays benefit from the taxpayer bailout directly?
2.       What is the link between the bailout and the payment of bonuses?
3.       Is it OK to pay bonuses?

Did Barclay’s benefit? Well there is no doubt that, along with the rest of the financial sector of our economy, Barclays benefited from the decision to “bail out” some of the banks. The former Chief Executive of the banks admitted as much:

"There are two ways I would say the system as a whole benefited generically. One was in the injection of liquidity undertaken by the Bank of England and a new structure put in place in March 2008. And the other was the making available of guarantees from government for funding undertaken by banks.

"It is important to recognise that in each case the banks were encouraged to use these new structures that were put in place and we did.

"It is also important to recognise that we were required and we did pay a price for these things but I'm not trivialising the importance of the intervention. It was important.”

However, the benefit to Barclays was not direct and, as we know, it cost the bank (and its shareholders) dearly not to play a full part in the bail out.

Barclays has said it is to raise £6.5bn of new capital. The bank is to raise the money from private investors, rather than going to the government. Barclays also said it would scrap its final dividend payout for 2008, saving it £2bn.

We do not know what would have happened to Barclays had the government not bailed out other banks – certainly the view of the industry was that the bailout acted to stabilise an unstable situation. The bank benefited through that stabilisation rather than in a direct way – most of the “Barclays’ benefited arguments are “what if” arguments: had the bailout not happened Barclays would have suffered greater losses. Which, of course, may be true but those additional losses are not quantifiable and the Bank shares this with most other businesses in the UK!

Linking the bailout and paying bonuses. Let’s be straight here, Barclays is a private business owned by private shareholders – indeed, those shareholders (and I am one of them) could be critical of the bank for rewarding executives over delivering return on investment. However, the core of the argument is that the level of Barclays’ recent profits was only possible because of the ‘bailout’. This may indeed by the case – we’ve seen how the previous chief executive acknowledged that the bailout was helpful to the company. However, to ascribe the whole of the profits to the bailout is clearly a misplaced argument and we have no way of assessing what proportion of the profits actually did relate to the bailout.

To understand this let’s look at what is said about the recently published figures which seem to show that the reason for the profit rise is only marginally connected to the ‘bailout’. Indeed reductions of bad debts and other impairments in places like Spain and the USA are cited as leading reasons in the statements from the Company. The only part where the bailout may have help is in UK domestic banking – where the uplift is around £300m.

And, despite the increased profits, the amount of bonus paid is down:

Barclays announced a new compensation system following its Project Merlin deal with the government which will see it pay 7% less in performance awards than last year. At its investment banking arm Barclays Capital, which saw pre-tax profits excluding own credit increase by 2% to £4.4 billion, the bonus pool will be 12% lower than last year.

Given that these bonuses are part of the typical remuneration package for many bank employees (and not just a few ‘masters of the universe’) it is hard to see why bonuses shouldn’t be paid when profits are increased. And I see nothing in the results that suggests a link between bonuses and underperformance or bonuses and the ‘bailout’.

The real point of Ben’s tweet is my third question – is it OK to pay bonuses? And the discussion has to be stopped there since it is plainly inequitable to say, for example, that science journalists can earn bonuses whereas bankers cannot. So Ben must be opposed to the paying of bonuses – in the case of banks, until some specified period of post-bailout penance has been completed.

Ben is entitled to feel uncomfortable – even angry – at high bonus payments but the evidence does not support his contention of stupidity. It shows a misunderstanding of business, of microeconomic incentives and a careless assumption that a £20,000 bonus to a classified advertising salesman on the Guardian is morally different from a £3.4 million bonus to a banking boss. Or for that matter a £10m plus remuneration package for a jug-eared football player.

As I said - Ben should either apply the same rigour to business as he does to scientific research. Either that or stay away from economics!


1 comment:

Schroedinger99 said...

1) Ben did NOT say that bonus payments of several million pounds were stupid, he said that the argument that such bonuses are OK when the bank in question did not benefit directly from public money was stupid.

2) My assumption is that Ben (like me) finds bonus payments of several million pounds to individual people not "stupid" but obscene and unnecessary - though he doesn't actually say this.

3) It is perfectly possible that Ben (like me) also finds bonus payments of several million pounds to individual people obscene and unnecessary even when the recipients are not bankers.

4) I'd like to see the evidence that bonus payments of several million pounds to individual people are necessary to retain the staff in question or the evidence that, when such staff decide to leave because they are not receiving bonus payments of several million pounds, this makes any difference whatsoever to the fortunes of the financial institutions concerned.