According to the Telegraph, with legislation proposed by Alistair Darling set to be enacted before the general election next year, the FSA will get the power to amend bankers’ contracts after the fact to prevent ‘unjustifiable’ bonuses. This effectively means state control over bankers’ wages. A very attractive proposal given recent occurrences in the City.

However, it is up to the banks themselves to decide what risk profile they take. After all, they are in the business of banking and need to react to the current climate at any given time. We could end up with a disconnect between the risk the FSA wants the banks to take and the risk that business in general needs to be taken to function properly.

When the banks decide on a risk profile they employ people to work to that profile. With banking Chinese Walls (where one part of a bank doesn’t know what the other part is doing so making fraud and insider trading harder) it is reasonable for people to go with what the management are asking them to do.

It would therefore be very unfair to hammer people who thought they were doing a good job for the bank and were working towards the bonuses on offer.

Maybe what we need to understand more is that bankers do not directly generate cash or wealth. They facilitate its generation by shuffling money about and making it available to wealth creators. The banks’ profits, running costs and bonuses are extracted from the wealth created and so is a drag factor. A drag factor that could be reduced by lower bonuses, wages and running costs. Point to note, the more shuffling the greater the profits. The rewards are great because there are few places people can get these sorts of services from.

A lot of people in many industries rely on bonuses and get high pay including the public services. Once the government have got their claws into banking pay, what next? Pharmaceutical profits, engineering profits, supermarket profits? It may be the opening of a very large can of worms.

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