Back in 2005, I discussed an article from that Financial Times which noted that overpaid bankers were 'the poster boys for the left' as "no other industry asks shareholders to take on the bulk of risks, while it gives half of all revenues to employees."
As the graph shows (from this WSJ article), bankers manage to capture more than half of the surplus of banks in good times, and to extract some (ie causing losses to their employers) in bad times.
As the debate rages on as to what might be adequate compensation for bankers, let me repost here what I wrote 4 years ago:
As an investment banker myself, I know how easy it is to claim that I "made" x million for my bank, when I am just one - visible - cog in a big machinery that has decided that it was willing to rent the resource it plays with (money) in a given sector or to certain kinds of clients. So my claim to value viz. the client is that I have the ability to convince my employer to provide large chunks of that resource to such client, and when dealing with such large discrete bits of the resource (say 50 million at a time), the corresponding remuneration that I can claim responsibility for, as the tip of the machinery in contact with the client (say 1%) appears very large, and it's easy to say that a small piece of it should really go to me.
And it's true that I have some leeway with the client. I don't create value (well, I do, but probably not that much), but I can allocate a lot of it between the client and the bank very easily, in ways that are very hard for anybody else to control, and the best way for the bank to make sure that it gets a fair chunk of it is to give me some incentive to do so. So I benefit from (i) dealing with large amounts (anything below a million is chump change), (ii) being very specialised (and thus harder to replace), (iii) being on the front line with the client (thus able to influence outcomes and claim credit) and (iv) actually getting deals done (hey, give us a little bit of credit!).
In other words, it is structurally easy for the people that have their hands on the money tap to claim that they are the almost-exclusive reason money is flowing. Thus bonuses will always tend to inflate as long as money flows (obviously today is a bit different in that respect), and it is never going to be easy to limit them, barring highly unusual circumstances, which may or may not last.
And if you start regulating one type of remuneration, you can be sure that bankers will find ways to get paid in ways that are not restricted.
Which means that the solution has to be somewhere else: in tax policy. Bonuses (to be defined as all compensation received by bankers or licenced financiers beyond their salary should be specifically subject to very high marginal rates above certain threshholds. That would limit the incentive to go for massively inflated numbers. It's the only way, in fact, and it will have the nice side effect of limiting the "arms race" with CEOs and other highly paid management, and of generating income for government.
Remember that the current crisis is an income crisis, in that both the government and the middle classes have been starved of revenue and encouraged to get into debt to continue to spend. Increasing taxes, however strange that may seem today, is the main way to incrase government revenues, and it is esepcially important at a time when households are reducing their spending and goverment is expected to take over to "save" the economy.
And it's not like there's no scope for tax increases:
Richest Americans' Income Doubled as Tax Rate Slashed
Jan. 30 (Bloomberg) -- The average tax rate paid by the richest 400 Americans fell by a third to 17.2 percent through the first six years of the Bush administration and their average income doubled to $263.3 million, new IRS data show.
The 17.2 percent tax rate in 2006 was the lowest since the IRS began tracking the 400 largest taxpayers in 1992, although the richest 400 Americans paid more tax on an inflation-adjusted basis than any year since 2000.
The drop from 2001's tax rate of 22.9 percent was due largely to ex-President George W. Bush's push to cut tax rates on most capital gains to 15 percent in 2003.
Increasing their tax rates would only bring us back to the late 90s, terrible times for millionaires as we know.
I understand that bonuses are scandalous, but they are really a question for shareholders - so either the government admits it owns and controls banks, and it can set policies for remuneration packages, or it stays out of this, but sets tax rates that allow for a decent enough chunk of that money to come into the common pot and be used for publicly useful purposes.
And if the issue is that government is too incompetent to use or allocate the money, then, what can I say - let the money with the bankers, after all they were brash and American enough to go for it, and were rewarded as it should be.