Mass Hesteria

Some random thoughts about Stephen Hester (in a couple of years, we'll all be saying "who?"):

David Cameron & co have claimed that their hands are tied due to contracts signed by the previous government. This is peculiar. I don't recall Andrew Lansley saying that he couldn't reform/gut the NHS because Nye Bevan had committed all subsequent governments to cherish it. Indeed, what would be the point of electing anyone if they are powerless to change previous policy and reverse decisions?

To be fair, the Blair/Brown government were guilty of a similar canard, specifically in the form of PFI contracts. I'd like to believe this is simple weaseliness, but I'm worried it shows that the modern political class consider a commercial contract to be paramount, sacrosanct even. That's fundamentally anti-democratic.

RBS was bailed out by the state because its collapse might have led to a general financial panic and, according to Alistair Darling, cashpoints shutting down. Given that it presented such a threat to the nation, you might see the task of putting it back on an even keel as a national emergency.

So, why didn't the government simply ask for a volunteer from the banking community to take the helm as a civic duty, with no expectation of reward beyond a grateful nation's thanks (and probably a life peerage). Given that he was already a multi-millionaire, you'd have thought Hester would not have needed financial inducement. Perhaps patriotism is not a currency in which The City deals.

A major plank of the defence of Hester's bonus (and, by extension, CEO bonuses elsewhere) has been the claim that RBS is a complex organisation that only a handful of highly specialised (and highly paid) businessmen would be capable of managing.

One could point out that UK banks were only made truly complex in recent times, starting in the 90s with the "big is better" mergers (to ensure global scope), deregulation (allowing combos of investment, commercial banking and stockbroking), increased dependence on technology and automated trading (quants etc), and the diffusion of risk through derivatives.

Not only was much of this increase in complexity self-interested, but it served to increase the internal opacity of the banks to the point where senior management were incapable of properly managing risk. Fred Goodwin proved that he didn't really know what was going on. Why should we believe that Stephen Hester knows better? He may now be focusing on areas that Goodwin neglected, but that could simply mean he is ignoring other, newer issues. The one is no more omniscient than the other.

The truth is that complexity (in the sense used here) is just a factor of business organisation and is mitigated through management. The higher up the management tree you are, the greater the structural mitigation. Complexity itself is not an adequate reason for a bonus. Implementing better management to further mitigate complexity would be grounds for a bonus.

In other words, "Stephen Hester deserves a bonus because he has made RBS less complex" has more merit than "Stephen Hester deserves a bonus because RBS is complex".