Alex Hern examines the common link between the appalling bad RBS quarter, and the appallingly good Centrica one: Rewards for failure.
A double dose of rewards for failure today: The failed bank RBS has given out so many bonuses that they went from profit to loss; and British Gas’ owner Centrica has announced profits of £2.4 billion despite – or perhaps because of – rocketing energy bills.
How did Stephen Hester defend rewarding a poor quarter so strongly? By telling BBC news that:
“Big losses, in a very strange way, are a sign of success“.
His argument, although appallingly phrased, makes a sort of sense. A lot of the losses are necessary, and now that they’ve been realised, some bad debts are off the books.
The BBC’s Robert Peston explains:
There are what might be seen as the necessary losses, the impact on the corpus of Royal Bank of Scotland of the painful medicine being administered by Stephen Hester. He is selling loans and investments regarded as surplus to requirements, and potentially toxic. And in accelerating the shrinkage of the bank in this way, he is accelerating the crystallisation of losses.
But ‘shrinking the bank is good’ is not the same as ‘large losses are good’.
This is partially because, as Peston details, many of the losses didn’t come from the ‘necessary’ ones:
Thus RBS has taken a loss of over £1bn on its loans to the Greek government, its holding of Greek government bonds. You can see this, in a way, as an event beyond RBS’s control, if you wish to be generous to the bank. On the other hand, no other British bank piled into Greek government debt to quite the same extent.
Also RBS is still making colossal losses in Ireland, thanks to its ownership of Ulster Bank. And there was an £850m charge to cover costs of compensation for those mis-sold PPI credit insurance (painful, but a peccadillo perhaps compared with Lloyds £3.2bn PPI costs).
And it’s also because, put simply, ‘less bad’ is not ‘good’. Large losses are bad for RBS; they just may have been unavoidable.
Apparently the rationale for performance-related pay has switched from “high profit shows our staff worked hard” to “profit or loss shows our staff worked hard”. If, as with most jobs, bankers are always working hard, then a flat wage might make more sense.
From Scottish banks to British Gas, failure is rewarded at the top.
As Friends of the Earth energy campaigner Paul Steedman said Centrica’s £2.4 billion profit:
“Centrica bosses and shareholders are set for bumper pay-outs while British Gas customers pay the price with sky-high energy bills – and Britain becomes ever more dependent on expensive, imported coal and gas.
“The big energy firms are reaping rich rewards from a failing energy system – ripping us off by keeping us hooked on dirty fossil fuels and through wasted energy.”
And as Olly Parker argued on Left Foot Forward last year, the fact Centrica is almost completely vertically integrated allows it to make profits far in excess of the risk the company shoulders:
One solution, pushed in private by a growing number of business voices, is the need to truly split up the UK market by separating the different branches of extraction, transmission, distribution and retail.
The lack of transparency around internal transfers and the ease with which large corporations can shift profits from one wing of the company to another is preventing the public from having the benefits of a truly competitive market.
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• All in it together? RBS fat cat “in line for £7m payout”. Seven. Million – Shamik Das, January 27th 2012
• The government has the power to stop Hester’s bonus, they just don’t want to – Ben Fox, January 27th 2012
• Progressives need a positive vision for Scotland – Ed Jacobs, January 26th 2012
• Questions multiply over financial status of an independent Scotland – Alex Hern, January 20th 2012
• A word for 2012: Liquidation – Cormac Hollingsworth, January 4th 2012