It is now clear that this happy model was never viable. Politicians and business people always strike naïve deals. Hester has been delivering his share of the bargain – there have been hiccups, but the consensus from fund managers and analysts is that he has done as good a job as possible in difficult circumstances, with massive regulatory changes depressing share prices and the return on equity – but was facing an unstoppable campaign. He is a talented CEO who should never have gone to work for the government and who doesn’t deserve to be vilified.
His decision not to take a bonus had become inevitable after Labour MPs called a vote in Parliament. All of this was predictable. It is impossible to run a bank – especially one with a large investment bank unit – as part of the public sector. One can only do it for a very short period of time, as the US institutions found during the Tarp episode; they paid the money back very quickly to liberate themselves from the state’s shackles. Permanent state ownership means political considerations take over; and the pressure builds to pay bank employees like civil servants.
So what will Hester do next? He could, of course, stick to his base pay this year and hope to pocket a much larger bonus in subsequent years. But it is clear that there will be a similar row next year – and the year after. So what will he do? He’s a banker, not a charity worker. We are told he will tough it out – let’s see. And what will happen to other RBS staff? Will their pay be capped too, regardless of performance? This is bound to lead to an implosion of parts of the business, cutting the firm’s value. The bank is already downsizing its investment bank to a degree that some believe must be at least partly politically driven. Last but not least, will RBS now be given a non-commercial mission? If the economy continues to stagnate or shrink, the government will become ever more desperate for banks to engage in non-profitable lending. But this would destroy the bank’s value and cost taxpayers dear.
Nationalising RBS was a monumental error; no bank must ever bailed out again. Resolution and bail-in procedures to properly wind-down even the largest institution must be ready for use the next time there is a crisis. The government’s takeover of part of the banking industry in 2008 – combined with a stagnant economy and a flawed narrative about the real causes of the crisis – has triggered a cultural shift that will turn out to be disastrous for Western capitalism and prosperity. The public saved £1m yesterday (or in fact £500,000, as half of Hester’s bonus would have been paid in tax). Let us hope it hasn’t also lost billions by further damaging its investment in RBS.
Follow me on Twitter: @allisterheath