Bankers bonuses explained?

Bankers are just bonus-snaffling Marxists
Why did financiers think they could get away with rewarding themselves so lavishly? The answer lies in Tito’s Yugoslavia

Anatole Kaletsky

Times 14 January 2010

Stephen Hester, Sir Fred Goodwin’s successor as chief executive of the now-nationalised Royal Bank of Scotland, sheepishly admitted this week that even his mother and father saw his £10 million bonus package as too high. But, in less widely reported testimony to the Treasury Select Committee he made a remark that pointed to savings thousands of times larger than his bonus.

The business of RBS, he said, was now recovering so quickly that the Government would be able to reprivatise it (presumably at a large profit for the Treasury) several years ahead of schedule and the bank would make no recourse at all to the controversial government guarantees, whose potential cost to taxpayers was estimated by many experts at £200 billion or higher just six months ago.

With banks all over the world now apparently making money even faster than they were losing it last year, is it possible that bankers such as Mr Hester are, after all, financial geniuses whose talents fully justify their multimillion-pound rewards? Instinctively we all realise, like Mr Hester’s Mum and Dad, that the answer is no, but pinning down the exact reasons why bankers’ bonuses are economically unjustified is surprisingly hard. Last year’s explanation that bankers make their fortunes at the expense of taxpayers no longer seems so convincing now that the public guarantees have mostly been repaid with interest and it looks like governments all over the world will make a modest profit on their financial interventions.

Another tempting explanation is that banks overcharge consumers because they enjoy monopolies, but this is hard to sustain after a decade in which banks offered mortgages below the Bank of England’s base rate. And numerous studies by anti-trust authorities show that competition in most banking markets was actually pretty intense, at least until the crisis of 2007-09.

In the hundreds of articles and lectures about the banking crisis from academics, politicians and regulators, a plausible analysis of why bankers are overpaid has never emerged. Yet understanding this issue is critical in designing sensible policies, not only on the pay and bonus controversies, but with regard to the stability of the financial system as a whole. So here goes my attempt.

Banks are different from other businesses in two crucial respects. The products banks sell are impossible to value accurately because they relate to unpredictable future events, most obviously whether borrowers will repay their debts. This also applies to several other businesses, most obviously insurance, but banks have another unique characteristic. A bank’s survival depends entirely on the confidence of its depositors, who can withdraw their money at any time — and if confidence in one major bank collapses, a chain reaction of financial failures can easily follow, with catastrophic results for the whole economy.

These unusual features of banks imply a series of controversial conclusions. The first is that all banks are potentially too important to fail. Even if bank failures may be acceptable in normal conditions, there will be times, perhaps only once every generation, when governments simply cannot allow any bank to fail.

The idea that the regulatory problems exposed by last year’s crisis could be solved simply by breaking up banks into smaller or simpler institutions so as to overcome the “too big to fail” syndrome is a delusion. The collapse of a bank such as Lehman, with no consumer deposits, might have done no great harm had it happened a few years earlier. But against the background of a broader financial crisis, Lehman’s failure was catastrophic and imposed costs on society hundreds of times greater than the modest (or zero) cost of providing temporary government guarantees.

Once it is accepted that all banks, regardless of size, can sometimes be too important to fail, a second conclusion follows: the taxpayer is a silent partner in every banking business, whether it is openly nationalised, such as RBS, or purely private, such as Goldman Sachs or HSBC. And that, in turn, means that taxpayer interests must be explicitly represented in the business decisions of the banks, alongside the interests of the private shareholders. But how is this to be achieved?

One approach is to give taxpayers a permanent share of all bank revenues, either through special taxes or by forcing banks to keep a substantial portion of their deposits in zero-interest government bonds. Another is to ensure that banks must be managed so as to minimise the risk of the implicit taxpayer guarantees ever being called.

This is where we come back to bankers’ bonuses. The surest way of protecting the interests of taxpayers as silent shareholders in the banks is to ensure that these companies make very big profits and then to force banks to retain these profits as a cushion against future losses. The objective of bank profitability has now been spectacularly achieved by government monetary policies, rather than the financial genius of talented bankers. The next question is how banks’ boards of directors can be made to keep profits within the business instead of paying them out as excessive salaries and bonuses.

To do this, governments must recognise that their interests, as silent partners, are aligned with bank shareholders and at odds with the interests of bank employees. In a bank, as in any private business, income has to be shared between shareholders and employees. The peculiarity of banking is that boards of directors, instead of protecting shareholders’ interests, have maximised employees’ earnings. Banks have been run as old-fashioned professional partnerships or workers’ co-operatives, in which the interests of the workers come first and outside providers of capital are treated as an afterthought.

Those readers old enough may recall a fad among economists in the 1960s to extol the virtues of Yugoslav workers’ co-operatives, which supposedly combined the virtues of free enterprise and social justice towards workers. This is what most banks have become. The problem with the co-operatives became apparent only after the break-up of Yugoslavia. Managers paid out all the revenues as wages and allowed their capital to disappear. Workers’ co-operatives, by their nature, tend to decapitalise and plunder the businesses they control.

The 1980s and 1990s brought the victory of capital over labour almost everywhere. Finance was the one ironic exception. In finance, the workers triumphed over the owners of capital. Governments, as silent shareholders in every banking business, must now overcome the City and Wall Street, the last bastions of Marxist workers’ control.

Auschwitz and the ravages of Time

Auschwitz asks Britain for help to preserve decaying death camp

Roger Boyes

Times 13 January 2010

The guard towers of Auschwitz are splintering, the barracks are waterlogged: the concentration camp where one million Jews were slaughtered is decaying so fast that conservationists have called on Britain to help to save it.
The theft last month of its distinctive, sinister sign, Arbeit macht frei (work sets you free) has underlined the vulnerability of the Nazi death camp, stretching over 20 hectares (50 acres) of southern Poland.

“Nobody could have imagined such a horrific act of vandalism,” Jacek Kastelaniec, director-general of the Auschwitz-Birkenau Foundation, said. “Now try to imagine the public outcry if one of the barracks started to fall down, impossible to restore.”

Auschwitz was built on boggy ground between two rivers; as a result the high groundwater and bad drainage has rotted the foundations. Walls are blistering and starting to lean, roof frames are buckling, plasterwork and wall-paintings are flaking.

Mr Kastelaniec will go to the Cabinet Office tomorrow to press the Government on Gordon Brown’s promise to contribute to a €120million (£110million) endowment fund that will guarantee the preservation of one of the main sites of the Holocaust. Mr Brown visited the camp last April, and, plainly upset by what he had seen, declared: “We will join with other countries in supporting the maintenance and retention of the memorial at Auschwitz.” No figure has been suggested publicly for Britain’s possible contribution, but Polish sources say that the conservationists are hoping for about €10million.

Angela Merkel, the German Chancellor, has said that her country would put up half of the costs, but the managers of the Auschwitz museum need other commitments. Mr Kastelaniec will also visit France, Belgium and the United States. The Polish Prime Minister, Donald Tusk, has sent an appeal to 40 heads of government.

“The conservationists say we need to start work in the next two years if we are to avert irreparable decay,” Mr Kastelaniec told The Times, “and that will only be possible if the money is paid into the fund now.”
The decay of the camp is politically sensitive. The current trial in Munich of the alleged Sobibor camp guard John Demjanjuk is being seen by the public as the last for Nazi war crimes — the 89-year-old defendant is wheeled into court on a hospital bed. Holocaust survivors are dwindling. “In ten years there will be no witnesses,” Mr Kastelaniec said, “and it will be easier for the crazy people who say nothing happened in the camps.” Only the buildings will remain.

Auschwitz cannot simply have a makeover because that would undermine its claims to authenticity, and open the way for those on the far Right who try to deny or trivialise the Holocaust. The strategic point of the restoration is to use its almost over-powering sense of menace as a clinching counter-argument against anti-Semitism and racism.

The portfolio to be presented to the British Government underlines the vast scale of the camp. The priority is being set on 45 brick barracks. The managers estimate that it will cost up to €890,000 to restore a single barracks building. On top of that come 22 wooden barrack rooms — where inmates were crowded into bunks up to the ceiling. Each will cost €310,000.

Then there are the remains of 210 barrack buildings. Some sheds have collapsed, but there are concrete outlines where floors and chimneys stood. Without some strengthening, these foundation markings will disappear. Cost: €78,000 per barrack room. The 27 wooden guard towers need to be reinforced at an annual cost, for the next 14 years, of €62,000.

Work is under way on conserving the ruins of the gas chambers and crematoriums, but the managers want to extend this to include a provisional gas chamber-bunker, two other crematoriums and the unloading ramp.

Property taken from prisoners before they were gassed, now exhibited in small piles in the museum, is also showing signs of age: 460 artifical limbs, 40kg (90lb) of discarded spectacles, 260 prayer garments and 3,800 suitcases that belonged to people who ended their journey in Auschwitz.

The sluggish response worldwide to the restoration had been down, in part, to the feeling that the main burden should be on Germany. Mr Kastelaniec said: “The breakthrough came when we convinced not only Germany but also other contributors that this was not a project about guilt, but about the future.”

'One in six British 9 to 11-year olds thought Auschwitz was a theme park'

Roger Boyes

Times 13 January 2010

Auschwitz is still largely intact, but it is crumbling. Knowledge of the Holocaust among the young is patchy and getting thinner by the year.So the question arises: is it better to use resources to prop up the buildings of an evil place in southern Poland — or into education to improve the understanding of the Nazis’ systematic massacre of Jews and other minorities?

A survey found that one in six British 9 to 11-year-olds thought that Auschwitz was a theme park. We have to do better. To his credit Gordon Brown saw the gap in the knowledge of the over-16s and, as Chancellor, allocated funds to allow two teenage pupils from every secondary school in the country to make an annual visit to the camp.

But children need also to be guided through the mentality of racist ideology. Grandparents of today’s teenagers are usually too young to have fought in the war. Many children with Muslim parents receive a less than complete explanation of the Holocaust. Some teachers try to dodge questions about anti-Semitism. So is the answer to use the British funds that Auschwitz needs on bombarding schools with books and DVDs and sending teachers on Holocaust awareness courses? No. That money has to be found elsewhere.

Auschwitz has to stay an authentic Holocaust site. The last Nazis are dying out; the surviving victims do not have long to live. Auschwitz has to convey to new generations an absoluteness, a moral clarity. The buildings have to be preserved. To let them collapse is the first step to amnesia. They must be an active testimonial to speak for the witnesses who have passed on.
The buildings are part of the unwritten biographies of the dead and there is an international duty to keep them standing. Britain should help to shoulder that responsibility.

'Aleksandr Solzhenitsyn was my father'

As one of the controversial author’s most acerbic books is reissued, his son reveals what it was like growing up in America with the Russian literary legend

Daniel Kalder

Times January 5 2010

“The name cuts both ways. It’s a fact of life in my performing career. I don’t think about it a great deal but I am often reminded that others think about it perhaps more than I do.” Ignat Solzhenitsyn is sitting with me in a restaurant on the Upper West Side, Manhattan. The son of Aleksandr Solzhenitsyn has just completed a successful five-week tour of Germany and Russia. As an acclaimed pianist and conductor he works with the finest orchestras, even sharing the podium with Valery Gergiev, the legendary artistic director of Mariinsky Theatre, St Petersburg.

His home base, however, is New York, in which he lives with his American wife and three children Dmitri, 8, Anna, 7, and Andrei, 1. He is also conductor laureate of the Chamber Orchestra Philadelphia and professor of piano at the eminent Curtis Institute of Music, also in Philadelphia.

“It’s good to be busy,” Ignat says. Today we are discussing not music but rather In the First Circle, his father’s Cold War masterpiece just published in the US in a new radically retranslated edition, which is greatly expanded (96 chapters instead of 87), much more caustic in its political criticisms and with a bonus preposition (the “in” of the title). It’s a story of four days in a sharashka, a special camp where prisoner-scientists worked on secret projects for the Stalinist regime. In Solzhenitsyn’s hands it becomes a window on the entire Soviet Union.

“Actually, this is not a new version but rather the original version, that Aleksandr Solzhenitsyn always wanted people to read,” Ignat says. “The book that was smuggled out to the West and published in 1968 had been ‘lightened’ by my father in the hope that he could get it past the Soviet censors. He restored the original text in exile, and this was published in Russian in 1978. English translations have always lagged behind, but I’m delighted that HarperCollins has finally seen fit to translate the whole thing.”

Polite but formal in his e-mail correspondence, I had expected Ignat to be an intimidating figure. This is the son of a man who survived the Second World War, the gulag, exile, stomach cancer and persecution by the KGB; who hastened the collapse of the USSR with his politically explosive books; and who alienated liberal Western opinion with his infamous Harvard address of 1978 in which he attacked “decadent” Western culture. If even a fraction of this ferociously defiant, contrarian attitude had rubbed off on his son, then I was in for a difficult interview. And yet Ignat, 37, a big, burly man, was open, warm, and gregarious and entirely lacking in pretension or pomposity. Did he or his two brothers ever find their father overwhelming? “No. You hear about quirks and deviations with artists, but we were very fortunate. I can’t imagine a great man being more normal than he was.”

Normal: not a word that featured in any of the obituaries published when Solzhenitsyn died in August 2008 aged 89. Opinion was divided over his achievements, as it still is. Was he the literary heir to Tolstoy and a hero? Or was he a “Russian Khomeini” with “virulently reactionary” political views?

Reading In the First Circle, I found the overtly political aspect the least interesting part of the book. Nowadays, when bookshop shelves groan under weighty tomes of the evils of Stalinism, accusations that the dictator was a Tsarist double agent, or declarations that the USSR should not be allowed the nuclear bomb, have inevitably lost the impact they would have had in 1955-58 when Solzhenitsyn was writing.

What shines through instead is his profound empathy: for the erotic longing of prisoners, for the guards terrified of landing on the wrong side of the prison bars, for the wives left behind, and especially for those who disagree with the author’s opinions. Solzhenitsyn’s “polyphonic” structure allows each of the 60 significant characters to speak in his or her own voice. One of the most sympathetic portraits drawn is of Lev Rubin, a Jewish communist, who passionately believes in everything that Solzhenitsyn rejected. More striking still is the portrait of Stalin. The author depicts a man haunted by his past, paranoid, isolated and fearful — almost deserving of pity. Professor Edward Ericson, in the introduction, even declares: “Dzhugashvili the onetime seminarian has turned himself into Stalin the ruler, but also the greatest victim of the infernal empire.”

I put it to Ignat that this sympathy for the tyrant is remarkable, considering how his father suffered at the hands of the regime. “This humaneness is a very much under-appreciated facet of his world view,” he says. “There is this notion that Solzhenitsyn was so intolerant, that everything was black and white for him and, well — bollocks! He rejected flatly those who sought to reduce his art or everything that he was to a political equation. In The Gulag Archipelago he says: ‘The line between good and evil does not go between parties, it does not go between countries. It goes across the heart of each person.’ He understood that we are all capable of becoming a camp guard, or a KGB informant.”

So why this image of the embittered, angry prophet? “Partly it was his fault — the strident political tone was not compatible with typical Western discourse. Then people saw the beard and, well, 2+2 = Old Testament prophet. But that was a result of the urgency of the times he was living in. People did not understand the world he had come from.”

Ignat left Moscow aged 18 months, joining his father in exile in Zurich, before moving to rural Vermont where the family lived for nearly two decades. He first encountered Stalin’s empire at the age of 7, when Solzhenitsyn read his story Matryona’s House aloud to his three sons.
“I remember being very struck by it. Not understanding everything, but then reading the short stories, Ivan Denisovich . . . Soviet reality was never far from our consciousness or conversation. I think that’s something we imbibed with mother’s milk — a very clear understanding of what life was like for them, for their friends, for the whole country.”

Ignat describes his home life, immersed in literature, art and music, as “extraordinarily rich”. A word that he uses repeatedly is “organic”; his own discovery of music illustrates what he means by this. In the USSR many parents forced their children to study an instrument. Having seen the misery that this generally caused, Solzhenitsyn and his wife opposed music lessons for children and treated Ignat’s interest in piano as a hobby. It took a visit from the famous cellist Mstislav Rostropovich for his gift to be recognised, after which his parents encouraged him wholeheartedly. I remark that this sounds almost liberal. “If this seems at odds with the image in the West,” Ignat says, “then I’m here to testify that that image is largely inaccurate. There is a confusion between my father taking his work seriously and taking himself seriously. He was a man of great humility.”

Indeed, the “prophet” who railed against Western culture encouraged his sons to learn English and had them educated at local schools. When Ignat and his brothers brought Black Sabbath records home — music that Solzhenitsyn abhorred — no attempt was made to prevent them from listening to it. “I don’t remember anything that was forbidden or frowned upon other than a failure to live up to the standards of basic human decency.”

Free to mix with American children, the brothers became linguistically and culturally bilingual. Solzhenitsyn listened eagerly to the stories that they brought back from their travels abroad and was fascinated when they introduced him to new American literature. Yet the world outside viewed him as an embittered hermit, hiding behind a barbed-wire fence.

“The seclusion wasn’t a question of ‘I don’t want to be seen’,” Ignat replies. “I say this with certainty. After all the difficulties of writing in the USSR he finally had a chance to deepen his involvement in the major work of his life, The Red Wheel [an epic of the revolution, only partially translated into English]. He wanted to go someplace quiet where he could work without distractions. He said that he wished that he could have had the luxury to spend more time collecting impressions, mingling with Americans and travelling. But he knew that The Red Wheel would take every ounce of his time and energy and so he made his choice.”

And the barbed wire around the family farm? “You must remember that he had been nearly killed by the KGB in 1971. There were anonymous phone calls, constant threats against his family. And though he knew that this was a KGB psychological game it was very unnerving. If the KGB had wanted to get in they would have got in, of course, but the fence was a symbol and provided a measure of security — and it was also to stop gawkers.” The Solzhenitsyn family’s yearning for Russia never wavered. Ignat remembers new year celebrations, observed on Russian time, as “some of the brightest memories of my childhood”. This sense of connection was so powerful that Ignat’s brothers chose to live in Russia rather than the America in which they had grown up.

Today both of them are partners at the Moscow office of the international consulting firm McKinsey & Company: Yermolai, 38, specialises in precious metals while Stephan, 36, works in the area of new energy schemes. Like Ignat, they remain fiercely loyal to their father’s legacy, working with their mother Natalia on projects in Russia, but also internationally. For example, all three brothers produced translations for the English language Solzhenitysn Reader published in 2006.

As for Ignat, although he relishes the opportunity his work as a musician gives him to visit remote provinces of Russia where he says audiences are “especially receptive”, he is content to live in Manhattan. He stresses however that he has never felt like a stranger in Russia, even after a childhood spent in Vermont. When he first returned in 1993, invited to perform as a soloist on a Rostropovich concert tour, he found no significant difference between the real Russia and the country of his imagination.

“The picture that we learnt from my parents and their friends was of a country where people lived in brutally miserable conditions. So going back was extraordinarily moving but it was very much what I was expecting. And this leads us to another misconception: that Solzhenitsyn somehow had this idealised, mythical Russia in his head that no longer existed. It’s just bizarre. This is a man who fought in the Second World War, who spent eight years in the camps, who was in exile on the edge of the desert, who was treated in a Soviet clinic for cancer. And given all that, in terms of having experienced some of its worst attributes or realities, well, who knew Russia better than he did?”

The misconceptions surrounding Solzhenitsyn seem likely to persist, as will the debate over his legacy. In the First Circle, the masterpiece which waited 40 years to be properly translated, is yet to be reviewed by some parts of the US media and, even more bizarrely, no British edition is planned. In Russia Solzhenitsyn’s reputation is assured. Last week it was announced that The Gulag Archipelago will be taught in schools: thus Russian children will encounter the greatest work of a man who dedicated much of his life to the struggle against Soviet tyranny.

Ignat says: “He's a great example, not only as a great artist but as an extraordinary human being. To have a man like that as a father, yes, it’s a lot to live up to. My brothers and I cannot, and nor do we strive to, become him. But as an example of moral and physical courage, it’s a great example to have in one’s life.”

In the First Circle, by Aleksandr Solzhenitsyn, is published by HarperCollins US and is available at £10.99, including p&p

Very happpy Costa Rica

The Happiest People

Nicholas D Kristoff

New York Times 6 January 2010

Hmmm. You think it’s a coincidence? Costa Rica is one of the very few countries to have abolished its army, and it’s also arguably the happiest nation on earth.

There are several ways of measuring happiness in countries, all inexact, but this pearl of Central America does stunningly well by whatever system is used. For example, the World Database of Happiness, compiled by a Dutch sociologist on the basis of answers to surveys by Gallup and others, lists Costa Rica in the top spot out of 148 nations.That’s because Costa Ricans, asked to rate their own happiness on a 10-point scale, average 8.5. Denmark is next at 8.3, the United States ranks 20th at 7.4 and Togo and Tanzania bring up the caboose at 2.6.

Scholars also calculate happiness by determining “happy life years.” This figure results from merging average self-reported happiness, as above, with life expectancy. Using this system, Costa Rica again easily tops the list. The United States is 19th, and Zimbabwe comes in last.
A third approach is the “happy planet index,” devised by the New Economics Foundation, a liberal think tank. This combines happiness and longevity but adjusts for environmental impact — such as the carbon that countries spew. Here again, Costa Rica wins the day, for achieving contentment and longevity in an environmentally sustainable way. The Dominican Republic ranks second, the United States 114th (because of its huge ecological footprint) and Zimbabwe is last.

Maybe Costa Rican contentment has something to do with the chance to explore dazzling beaches on both sides of the country, when one isn’t admiring the sloths in the jungle (sloths truly are slothful, I discovered; they are the tortoises of the trees). Costa Rica has done an unusually good job preserving nature, and it’s surely easier to be happy while basking in sunshine and greenery than while shivering up north and suffering “nature deficit disorder.”

After dragging my 12-year-old daughter through Honduran slums and Nicaraguan villages on this trip, she was delighted to see a Costa Rican beach and stroll through a national park. Among her favorite animals now: iguanas and sloths. (Note to boss: Maybe we should have a columnist based in Costa Rica?)

What sets Costa Rica apart is its remarkable decision in 1949 to dissolve its armed forces and invest instead in education. Increased schooling created a more stable society, less prone to the conflicts that have raged elsewhere in Central America. Education also boosted the economy, enabling the country to become a major exporter of computer chips and improving English-language skills so as to attract American eco-tourists.I’m not antimilitary. But the evidence is strong that education is often a far better investment than artillery.

In Costa Rica, rising education levels also fostered impressive gender equality so that it ranks higher than the United States in the World Economic Forum gender gap index. This allows Costa Rica to use its female population more productively than is true in most of the region. Likewise, education nurtured improvements in health care, with life expectancy now about the same as in the United States — a bit longer in some data sets, a bit shorter in others.

Rising education levels also led the country to preserve its lush environment as an economic asset. Costa Rica is an ecological pioneer, introducing a carbon tax in 1997. The Environmental Performance Index, a collaboration of Yale and Columbia Universities, ranks Costa Rica at No. 5 in the world, the best outside Europe.

This emphasis on the environment hasn’t sabotaged Costa Rica’s economy but has bolstered it. Indeed, Costa Rica is one of the few countries that is seeing migration from the United States: Yankees are moving here to enjoy a low-cost retirement. My hunch is that in 25 years, we’ll see large numbers of English-speaking retirement communities along the Costa Rican coast.

Latin countries generally do well in happiness surveys. Mexico and Colombia rank higher than the United States in self-reported contentment. Perhaps one reason is a cultural emphasis on family and friends, on social capital over financial capital — but then again, Mexicans sometimes slip into the United States, presumably in pursuit of both happiness and assets.

Cross-country comparisons of happiness are controversial and uncertain. But what does seem quite clear is that Costa Rica’s national decision to invest in education rather than arms has paid rich dividends. Maybe the lesson for the United States is that we should devote fewer resources to shoring up foreign armies and more to bolstering schools both at home and abroad.

In the meantime, I encourage you to conduct your own research in Costa Rica, exploring those magnificent beaches or admiring those slothful sloths. It’ll surely make you happy.