Saturday, December 12, 2009

Windfall tax on bank bonuses

All through the financial crisis, the British government has shown remarkable leadership with important policy decisions. Even as the debate on bank restructuring was meandering along, Prime Minister Gordon Brown took the decision to nationalize Northern Rock and set the stage for the bank restructuring programs elsewhere. Similarly, the Bank of England was first off the block with its quantitative easing proposals to inject liquidity into credit starved financial markets. Amidst the ambivalence and confusion among policymakers, the Chairman of FSA, Lord Adair Turner came out in support of Tobin tax on short-term financial market transactions.

In the latest of such bold decisions, the British government has announced its plans to impose an one-time "super tax" of 50% on banker bonuses of more than £25,000 ($40700) on not only British banks but also the London subsidiaries of Wall Street giants. The French government too appear to be following the British lead and looks set to announce a windfall tax on bank bonuses.

Already the French government have entered into an agreement with top executives on voluntary limits on executive compensation. It was agreed that up to two-thirds of bonus payments should be deferred for three years, while a third should be paid in shares of the bank, and that the bonuses would be paid out based on the performances of the bank as a whole and not that of particular trading desks. Switzerland too have announced some loose restrictions on bonuses on executives of the biggest financial firms.

The British decision comes in the wake of massive profits and record bonuses already announced or expected in many financial market firms, who have benefitted from both government bailout assistance and the depleted competition in the aftermath of the sub-prime crisis. Wall Street banks alone are expected to payout more than $26 bn in bonuses this year, with Goldman Sachs leading the way, and in the wake of the British decision, pressure will surely mount on the Obama administration to follow suit. Justin Fox and Paul Krugman have come out in support of such bank bonus tax.

In anticipation of the public uproar, Goldman Sachs, enjoying one of its most profitable years, has announced that it would not award cash bonuses for its 30 senior-most executives this year and also let its shareholders vote on its executive pay decisions. However, these executives would be paid in the form of a special stock ("shares at risk", a form of restricted stock that cannot be sold for five years and includes a clawback option in case their businesses falter down the road) and the shareholder vote would not be binding on the Board. Goldman has already set aside $16.7 billion to pay its workers this year, a figure that translates into roughly $700,000 an employee.

Is Obama administration listening?

No comments: