The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

150 10 Disturbance of the Invisible Hand
the sake of the bank. He wanted to do well: “Truly, my goal was just to increase
activity.” 5
In view of the high turnovers and the colossal sums of money involved in the
banking business, the only possible solution is probably to ban bonuses altogether
and confine payment to the contractually agreed salary. Exaggerated bonuses are an
overextension of the principle of incentivization, as if financial services providers –
unlike professionals in other fields – can only deliver peak performance if every
decent idea bumps up their pay by an extra thousand. There is no excuse for the
financial sector to act as if it were governed by completely different rules from
other spheres of society. A Prime Minister cannot turn around at the end of his or her
term of office and say, “Look at everything I’ve done to take the country forward –
I deserve an extra five million.” Unduly high bonuses encourage a harmful entitlement
mentality, as if to say, “If I don’t get an extra million, I’ll give up thinking.”
This is untenable, firstly because there is an employment contract which stipulates
the contribution of work for a fixed salary, and secondly because it contravenes the
principle of shareholder value, since wrongly set incentives do not increase the value
of the firm. When managers are over-incentivized by bonuses, their first thoughts are
always about the bonus and the financial markets – and not about the firm. The effect
of the incentive is counterproductive, a distraction from the actual task in hand.
The state, in itself, has no right to rein in executive salaries. But if bank executives
have driven their banks into insolvency, and the state rescues these banks,
the treatment of executives must reflect that they now work for bankrupted institutions.
For the state, it would have been better to have let the rescued banks
formally declare bankruptcy; in other words, to have let them slip into insolvency
before steering them out of it. Since the state had stepped in to cloak the technical
insolvency of a bank and allowed it to remain in business, its contracts and
contractual bonuses remained in force, for better or worse, and the fact that executives
sued for their bonuses should not have come as any surprise. In a certain
way, by rescuing the banks in question from bankruptcy, the state was complicit
in Konkursverschleppung (unlawfully delaying the initiation of insolvency
proceedings).
A mentality dominated by share prices and shareholder value favored the taking
of excessive risks, which were rewarded with excessive salaries. When excessive
salaries are paid, this very fact points primarily to a disturbance of the market
mechanism, of competition. This weakness of competition ought to be addressed
by a long-term policy to reduce executive salaries in the finance industry while
conforming to free-market principles. The crucial question is, was there sufficient
competition throughout the echelons of banking? And if so, why did so few
come forward to earn such extremely large sums of money? Why was the market
for bankers and brokers not overrun by every highflier – as a consequence of
which, salary levels in this market would have fallen? It is tempting to suspect
that the bankers, and above all the investment bankers, simultaneously expanded
5 Ibid., p. 65.