Bankers' bonuses: The Northern Rock Precedent

On the 13 February, the former shareholders in Northern Rock lost their High Court bid to overturn a Government compensation scheme which they argued was based on criteria, set out in statute, that will result in their shares being valued at nothing.

The judges saw nothing unfair in the compensation scheme, requiring the Treasury to pay compensation on the same basis that it could fairly have paid in September 2007, rather than on the basis of a value enhanced by public funding unavailable elsewhere.

The government clearly took the view that without taxpayers money, Northern Rock would have gone bust. Had that happened, the shares would have been worth nothing. As it stands, under the compensation scheme, shareholders are likely to receive about 5p a share which falls far short of the £3-4 shareholders claim they deserve, but still 5p more than they would have earned had the bank gone under had the Treasury/taxpayer stood by and done nothing.

So where's the link to bonuses I hear you ask?

Well... the government claims it cannot force the nationalised or partly nationalised banks to stop paying all bonuses because many bankers have contracts stipulating bonuses that have to be paid and therefore if they violated these they would be open to legal challenge.

Therefore, we saw yesterday the government's "too little, too late" pressure applied on RBS to cut bonuses to the legal minimum i.e. to just those contractual obligations. Hence RBS will cut its bonuses from £1 billion to £175 million.

But is this good enough? Should failed bankers really receive £175 million in bonuses at RBS when the bank has been an abject failure?

The government should have done more. I'm not a lawyer, but the Northern Rock case made me think...

If the government can deny the shareholders of Northern Rock any real remuneration for their shares on the grounds that without taxpayers' money the bank would have gone bust, why can't the government say to the bankers of RBS that had taxpayers' money not been used to prop up the stricken bank, RBS would have gone bust and then those bankers whining about their bonuses stipulated in their contracts not only would not have received those bonuses, they wouldn't get a basic salary either because they would be out of a job.

The government has been far too meek on this issue and far too slow. Brown and Darling say they don't want to reward failure yet are standing by and letting that happen just because they are scared of a fight.