SIMON PATTERSON: The British public are right to be asking the question – what have we got for our money.  

JEFF RANDALL: Did you ever think about those bankers, you rascals, you blaggards, you know, you raped the country?  

ALISTAIR DARLING: They didn’t know what they were doing and we, not them to a large extent, are paying the price for that.    

SIR NIGEL RUDD: If I were the Prime Minister I’d ban the use of fairness as a word because I don't think you can be fair.  

SIR PHILIP HAMPTON: We do lynch mobs in this country better than most other countries I think.  

SIR PETER BURT: Perhaps they should count themselves lucky that there weren’t any lamp posts low enough from which to hang them in this day and age.  

RUTH MACKAY: Why would you pay somebody a bonus when they practically brought down the financial state of our country? 

JEFF RANDALL: From my studio in the heart of the City, I’m surrounded by banks. Bosses from HSBC, Barclays, Lloyds and RBS have all appeared on my show yet there’s a question still nagging away and it needs an answer. In a troubled economy where bankers have become panto villains, arch-enemies of the people, can they continue to pocket a king’s ransom in bonuses? This is my question to find out, What Is a Banker Really Worth? Forget for a moment all those London-centric images of the credit crunch and focus instead on this, the grandeur that is Edinburgh, home of the Royal Bank of Scotland, once the world’s biggest bank. It was in this city that the time bomb of the banking crisis was set ticking and the explosion that followed very nearly destroyed Britain’s entire financial system.  It was on the 7^th October 2008, a month after Lehman Brothers had folded, that RBS found itself on the brink of collapse. Shell-shocked directors in the bank’s Edinburgh headquarters were left powerless as global forces unravelled their business. You know, RBS’s share price fall apart in just 24 hours but this was no flight of small savers, little old ladies queuing to withdraw a few hundred quid. No, the problem that these guys here in Edinburgh had was the wholesale exit of professional investors terrified at being stuck on the share register of a bank that was quite literally running out of money. This is RBS’s sprawling head office, commissioned by its disgraced former Chief Executive, Fred Goodwin. If walls had ears, what a tale they could tell. It was here in this boardroom that Fred Goodwin was forced to reveal the full horror of the bank’s position to fellow directors, almost unbelievably insolvency loomed large. From here the only way of saving RBS was to call on the government for billions and billions of taxpayers’ money. Ministers rushed to the rescue, but why? What turned this man’s egregious failings into a national burden? The stability of a bank, unlike any other business, has implications for the economy and society as a whole. Not only do banks store our cash and lend us money, but also they act as a system of financial arteries, transporting cash and credit around the economy. For instance, without a functioning banking system very few people would be able to buy a house. Indeed, without a joined up network of banks, our system of exchange would fall apart, from buying goods on credit cards to withdrawing ten quid for lunch, banks underpin our day to day transactions. In an ideal world, banks put to work idle money to benefit their shareholders and customers and that, in short, is why those who run banks believe they deserve big salaries and bonuses. When it all goes well, everyone wins. The trouble is, it did not all go well. Some of our banks were driven to near ruin by overrated, overpaid and overindulged managers masquerading as masters of the universe.  It was another Scot whose headache this banking fiasco became. Alistair Darling was Chancellor of the Exchequer at the time of RBS’s implosion. At his Edinburgh home, I asked him about the day the penny dropped. Just tell us about that moment when you were looking at the Royal Bank of Scotland’s books and the light went on. You thought, crikey, this could sink the country?  

ALISTAIR DARLING, FORMER CHANCELLOR: I remember asking the Treasury officials, how big was this bank relative to the country? And the answer was quite simple, at that time RBS’s balance sheet was bigger than our national income. So here we were, one of the biggest economies in the world with one of the biggest banks in the world and we now owned it, had responsibility for it. Now that was a sobering experience.  

JEFF RANDALL: Did you ever think about those bankers, you rascals, you blaggards, you raped the country? 

ALISTAIR DARLING: Yes, you know, when I saw the people sitting across the table the thing that struck me was a number of them didn’t seem to realise what they’d done. I think one or two to this day still don’t realise they did anything wrong, which most people just find flabbergasting.    

JEFF RANDALL: They simply didn’t know what they were doing?  

ALISTAIR DARLING: They didn’t know what they were doing and we, not them to a large extent, are paying the price for that.    

JEFF RANDALL: RBS’s losses were so huge, even the City veteran who was parachuted in to turn the bank round could barely believe the numbers. Were you prepared for what you found when you arrived at RBS?  

SIR PHILIP HAMPTON, RBS CHAIRMAN: Well I’d done a bit of work on the bank before I arrived, I’d done a bit of due diligence but frankly no, I don't think I was totally prepared. I don’t think it was possible to get fully prepared for the scale of the challenges that the bank faced. The banks took on risks that they didn’t understand, didn’t control properly, so they had a period when profits were very high and therefore they paid themselves extraordinarily well and when there’s a linkage of pay and profits I don't think there’s a general problem. When it became evident that some of those profits were illusory effectively or certainly not sustainable and the profits collapsed and plenty of banks go bust, everybody says why are the bankers paid so much?  

JEFF RANDALL: The charge sheet against the banks is long and varied. Too much business risk, not enough pay restraint. Profiteering whilst at the same time missing lending targets. It all leaves a sour taste for people like Ruth Mackay whose fledgling marketing business is struggling to cope with the dearth of bank credit. To 2007 about 100,000 small enterprises have folded, many as a result of the squeeze caused by a banking system in retreat. I joined Ruth and one of her clients, another small business suffering from similar problems, and asked them if bank bonuses seemed justified when business loans were so hard to secure.  

RUTH MACKAY, SMALL BUSINESS OWNER: They’d look at your business plan, front page, back page, look at your figures and the answer from every single one of them was the same, you’d have to put your house up as collateral against it. If the business person that I spoke to in the bank had said it’s not viable for these reasons, that would have been a great service to us.    

ANGUS McPHERSON, SMALL BUSINESS OWNER: I’ve been to a number of presentations where banks are saying we’ve got money, we’re prepared to lend it to you and then you say yes, that’s fine but under what conditions? And they say, oh of course you need to put up your equity stake and oh yes, you need to pay interest rates at seven, eight percent above base and one looks at that and says, well wait a minute, base at half a percent and you are lending it out at seven, eight times, in fact fourteen, sixteen times that – I don’t want to be involved in this sort of business. It’s not that the money isn’t per se being offered, it is how it is being offered.  

RUTH MACKAY: I don't think we see the issue of them paying somebody a huge bonus as being directly relating to what they are or are not lending, we realise there is a lot more to it than that but to call it a bonus when they’ve failed is unbelievable and I think that’s got a huge amount of resentment, if you like, attached to it. Why would we pay somebody a bonus when they practically brought down the entire financial state of our country?  

JEFF RANDALL: As public anger builds, the high pay of bank bosses such as Stephen Hester and Bob Diamond comes under intense scrutiny but when did pots of gold first become commonplace?  

SIR NIGEL RUDD, FORMER DEPUTY CHAIRMAN BARCLAY’S: It all came about because the model that was run in partnership, investment banks used to be partnerships, Goldman Sachs until quite recently was a partnership, and what you had there was a division of the profits and when they were taken over by the large banks, they continued in a sense in that direction.  

DR THOMAS KIRCHMAIER, MANCHESTER BUSINESS SCHOOL: The banks provide the name, the framework, the infrastructure but the money making machine, the banker, actually moves around very quickly and the banks are obviously very competitive among themselves, they poach staff and drive this kind of bargaining game and with it the power for the banker up and so the salaries go up.  

 JEFF RANDALL: But despite the seven figure salaries of the bosses, their rewards are often eclipsed by those of star traders who can make fortunes for the banks and themselves by taking huge risk in obscure markets. On the dealing floor they shine brightly but off it they’re in the shadows. Venetia Thompson used to be a stockbroker. Tell us what it’s like on bonus day.  

VENETIA THOMPSON, FORMER STOCKBROKER AND AUTHOR: Well it’s the most anticipated day of the year probably and people start finding out over the course of a couple of weeks what they’re going to get and then people start throwing their toys out of the pram, refusing to come into the office, if the number isn’t right, having the big debates with the big bosses as to what they’re worth. If they’re worth more – which they always are in their minds.  

JEFF RANDALL: Of course but I didn’t realise it’s a consultative process so it’s not just here is the number, it’s open for debate?  

VENETIA THOMPSON: The number is given and depending on how good you are at your job, there’s room for manoeuvre I think.  

JEFF RANDALL: So setting aside the executive directors, what in your experience was a typical bonus for a young investment banker or trader?  

VENETIA THOMPSON: It wouldn’t be unusual to see people making, well they’d be on 70, 75 as a base salary and then you’re talking anything up to a million in bonus.  

JEFF RANDALL: Do these people really think they deserve that?  

VENETIA THOMPSON: I think when we start getting into a discussion about whether people deserve the money they’re paid I think it’s very dangerous because only the institution awarding that salary can decide that, I can’t, the government can’t.    

JEFF RANDALL: Now when government threatens to put a lid on bank pay it usually prompts fears that City big hitters will vote with their wallets and leave the UK for more obliging financial centres such as Switzerland or Dubai. For that to happen they would of course take with them the very considerable taxes they pay here but are they bluffing? How many have the flexibility simply to walk out rather than cough up? Those who defend bankers and banker’s salaries would say, well look, if we keep beating them up, if we keep trying to crimp their bonuses they’ll all leave the country, they’ll go somewhere else but you can understand, can’t you, why ordinary people here in Edinburgh would say well good, go somewhere else!  

SIR PETER BURT, FORMER BANK OF SCOTLAND CEO: Yes, absolutely, you can understand that and the reality is that not all of them would go.  

JEFF RANDALL: So if you were running the bank today, Peter, would you call their bluff, these very high paid players in the so-called casino bank? You’d say okay, there’s the door, welcome to the wide world?  

SIR PETER BURT: There would have to be exceptionally good [inaudible]. Alex Ferguson is not averse to showing people the door and I think that is one reason he is such a successful manager. His view is that no player, however good, is greater than the team and when you think of the people he has let go, and I think actually if that is true of eleven people for one person can produce a 9% impact, how true is it of an organisation with ten, twenty, thirty, fifty, eighty thousand people?  

JEFF RANDALL: After the break, I’ll be looking at the trend behind very high pay and asking, what are the costs of cutting it and whether the high watermark has already been passed. And with the reputation of bankers in the gutter, who now wants to become one?  

END OF PART ONE  

PART TWO

JEFF RANDALL: Since the credit crunch of 2008 the economy has wilted. Austerity is cutting into household budgets as the price of failure is paid by millions who did not cause it, which makes the City’s bonus bonanza even harder to swallow. But does the treasure chest of banker’s pay have to be a permanent fixture? Here’s some intriguing research from economists in the US. It covers the last one hundred years and charts how much more on average those working in finance might earn compared with others of similar education elsewhere in the private sector. As you can see, the 1920s were boom years with bankers earning on average about 60% more than their counterparts in other commercial businesses but by the end of the 1930s that gap had shrunk with banking’s premium all but vanishing and staying that way until the start of the 1980s when suddenly, bingo, the bonuses were back. But are they here to stay? So why did banker’s relative pay drop so significantly? A common assumption might be that the Wall Street Crash in 1929 blew away differentials but in fact the major reduction did not occur until the mid-1930s so why the delay? Well the answer was the introduction of tough regulation, limiting wild speculation and separating commercial banking from what have become known as casino operations. A dilution of that regulation in the 1980s and the ensuing boom in complex financial instruments meant that banking once again became an industry of high risk, low cunning and rich rewards. But, as we now know, it was precisely that so-called innovation, the financial sophistry, that brought the system crashing down. The remedy that is now being proposed – much tougher regulation – is not dissimilar to the action taken in the 1930s. So is bank pay about to diminish as it did then?   DR

THOMAS KIRCHMAIER: A tightly regulated business is always less profitable so it is very hard to disentangle it. Is it because the bank is less profitable or because the system is less competitive?    

SIR PHILIP HAMPTON: I think part of the reason for the pay is that the profits were not sustainable. They were there for a few years but they are not sustainable and the pay moved up to that level of profits and it now needs to be corrected down.    

JEFF RANDALL: On that basis, if you’re right and those profits were unsustainable, that level of profitability is not coming back, does that mean we’ve seen the high watermark of banker’s pay?  

SIR PHILIP HAMPTON: I think so, very much so.    

PROFESSOR LYNDA GRATTON, LONDON BUSINESS SCHOOL: They took more into their pocket than any other group has been able to do and they gave their shareholders less than any other group has been able to do.  

JEFF RANDALL: How were they able to manage that?  

PROFESSOR LYNDA GRATTON: Well because when you have a lot of money moving around, everybody gets some of it so everybody is sort of happy and it’s only when the whole model breaks as it did, that it become obvious that value was not being created. Value was actually being destroyed.      

 JEFF RANDALL: To be fair, bankers are not alone when it comes to high pay but do they deliver value for money? Measured over four years the brewing company SAB Miller made £1170 for every pound it paid the CEO, Tesco made £58 for every pound paid to its CEO but the banks were a very different story. The value of Barclay’s went down by £1622 for every pound paid to the boss and RBS lost £4188 of value for every pound paid to the Chief Executive. That research was undertaken by Simon Patterson, one of the UKs leading consultants on boardroom salaries. He believes RBS bonuses should be tied to a very specific target.  

SIMON PATTERSON, EXECUTIVE PAY CONSULTANT: In a sense the British public are right to be asking the question, what have we got for our money? Because we as UK taxpayers were, if you will, placed in the position of being owners and we got into that particular organisation at 50.5p …  

JEFF RANDALL: Per share?  

SIMON PATTERSON: Per share, I don't think it’s wrong for the UK taxpayer to expect that in terms of competition arrangements it ought to be very much tied to getting above 50p. Every time we get above 50p, every penny above that level I think is worth about £900 million to the UK taxpayer.  

JEFF RANDALL: Isn’t the other problem that at the moment the share price is not above 50p, in fact it’s about 27p?  

SIMON PATTERSON: It’s 27p!  

JEFF RANDALL: So we’ve got a long way to go.  

SIMON PATTERSON: We’ve a long way to go.  

JEFF RANDALL: Clearly, public fury is turning up the heat under bankers but should we be careful for what we wish? Does paying them less make us, the taxpayers, any better off? At Number 11, Gordon Brown presided over a regulatory regime that redefined light touch, not exactly what you might expect from a tax and spend Labour chancellor, so why did he let the bankers get away with so much? The answer is that the spending boom he orchestrated was funded in large part by revenues that flooded in from the City.  The figure that so dazzled Gordon Brown in those pre-credit crunch times was £40 billion. That was how much the banking sector paid in direct and indirect taxes. Now £40 billion in those days was about 8% of the government’s entire budget, more than all our spending on defence. Yes, those taxes on bonuses were very welcome.  

ALISTAIR DARLING: In the old days the Treasury used to cheer when those banks were announced however I think there’s a short-term cheer because in the long-term I don't think you can possibly pay all your revenues and get in lots of money from bonuses that may be based on a complete fantasy as to what’s happened.  

JEFF RANDALL: Do you not think that your party is in danger of pursuing populism here on this issue, pursuing these bankers, making bonuses the big issue when really you know and I know and I bet Ed Miliband really knows that actually Stephen Hester was probably fairly paid?  

ALISTAIR DARLING: Well I think Ed Miliband is right to raise the general issue about the relationship between what you do and what you get, however I said before, I think if you look at the whole business over Stephen Hester’s bonus, although the stopping of Fred Goodwin’s knighthood which is a complete conflict with the rules that are presently in place, I think that is a problem for all of us, the Prime Minister included, who went along with all this, on a whim it seems. The rest of the world looks at Britain as a place where there’s certainty, where the rule of law applies, where you know where you stand. Once you start fiddling around with that, there is a danger that people say, well hold on, one of the big assets that this country has is now in doubt.    

JEFF RANDALL: So, has political expediency and public resentment hijacked the agenda? When effigies of bankers are being strung up and burnt, does it reflect anger or envy? Could it be that Fred Goodwin was a victim and Stephen Hester actually deserved his million pound bonus?  

SIR PHILIP HAMPTON: We do lynch mobs in this country better than most other countries I think and I actually understand lots of their anger about the banking industry and I think lots of banks and bankers deserve lots of opprobrium but I think plenty of the opprobrium is directed now at the wrong people.  

 SIR NIGEL RUDD: I am outraged about the treatment of Stephen Hester, not for the reason that you might think. I am outraged because we’ve lost half a million pounds of tax.  

SIR PETER BURT: That’s a difficult one. My mother always said at the end of the day people will treat you the way you deserve to be treated so you’d better be nice to them. I think Fred Goodwin perhaps has an understandable beef about due process or lack of it, I think the witch hunt – because I can describe it as nothing else – orchestrated by, from all accounts, senior political figures. Perhaps they should count themselves lucky that there weren’t any lamp posts low enough from which to hang them in this day and age.  

JEFF RANDALL: So what are the views of those hoping to join this deeply troubled industry? Are they not bothered that the widespread view of bankers seems to be bandits in pinstripe suits? You will have noticed here in the UK bankers are not particularly popular people right now. In fact some people regard them as not much better than criminals, why do you want to go into banking?  

YOANA, LSE STUDENT: I understand British people disliking bankers because their two biggest banks had to be bailed out years ago and now taxpayers are paying for the mistakes of some bankers but I don't think that’s necessarily the case everywhere.  

DANIEL, LSE STUDENT: A few decades ago you know bankers were not actually the villains, bankers were viewed as the angel investors in the economy.  

JEFF RANDALL: Can I be nosy? What will you guys start on if all goes well?  

DANIEL: In the range of £32-45,000 a year.  

JEFF RANDALL: 32-45, and you’ll be starting somewhere in all that?  

DANIEL: Somewhere in there.  

JEFF RANDALL: And how about yourself?  

YOANA: Yes, the same.    

JEFF RANDALL: The same. You do realise the average salary in this country is £26,500 so you’ll be starting way above the earnings of people who have been working for years. If someone came up to you and said what is a banker really worth what would you say?  

DANIEL: In short, a banker is really worth as much as someone is ready to pay for him, just like everything else out in this world. If someone perceives a banker’s service as really valuable, bankers will be paid quite high.  

YOANA: You can say a banker is worth the current value of his future revenues that he is going to bring for example and if at the moment that is perceived to be very low, they should be punished for that and they shouldn’t receive their bonuses.  

SIR PHILIP HAMPTON: A banker is worth what he delivers and if he performs really well he should get really well paid. If he is not performing well he might keep his job, if he’s not performing well at all, he’s out.  

SIR NIGEL RUDD: If I was the Prime Minister I’d ban the use of fairness as a word because I don’t think you can be fair. I was involved with Barclay’s for many, many years, Bob Diamond and John Vardy made a huge difference to Barclay’s as they went through this terrible period.  

JEFF RANDALL: And in that sense, when they were both there, their pay was fair in your view?  

SIR NIGEL RUDD: Well actually I think that John Vardy was underpaid actually but that’s … because I think what he did during that crisis was absolutely phenomenal.  

SIR PETER BURT: For exceptional transactions, a banker is worth a substantial amount. Exceptional performance, yes, you should recognise but ten, twenty million every year, year in year out, for running a very large company? I don't think so.    

JEFF RANDALL: It’s been said that top executive pay is often a warm personal gesture from the beneficiary to himself, so what’s a banker really worth? In my view a little more than what the baying mob thinks but much less than many of those bankers receive.