Column Nick Leeson on why bankers' bonuses are a red herring

THE FORMER Managing Director of Allied Irish Banks last week received a €3m golden handshake. Justice Minister Alan Shatter is reported to have said that it ‘defied belief’. We should all congratulate him on getting something right!

The cost to the taxpayer of the bailout of the Irish banks has a baseline of €70 billion. I, unfortunately, think it will eventually run much higher. Each of us will be putting our hands in our pockets for many years to come in attempt to mitigate the stupidity of a system that moved as one in the wrong direction.

This former MD of AIB was in the job for less than a year, received a salary whilst he was there of €432,000, was made a termination payment of €707,000 and instead of a contribution to his pension, received a further payment in the region of €2m. Nice work if you can get it – but apart from winning the lottery none of us will get anywhere near it. As a career choice banking has to be top of the list as they clearly reward failure as quickly as they do success.

I regard myself as a capitalist with a distinct lack of socialist tendencies, so I found myself questioning this week how this came about – and whether or not I was right or wrong. Leaving school at the age eighteen, I went to work during the Big Bang era in the City of London. To a certain degree, I suppose, I became indoctrinated by the lure of the salaries that were available and the whispered rumours of bonuses that were available.

I still believe that success should be rewarded, of that I have no doubt. I also believe that to pass through the current financial storm, that we need the best people at the wheel and that they must be paid well for steering the right course. Recruiting from within – as was the case in this episode - and rewarding handsomely for it, however, is clearly wrong.

History will show that this will just be one of a long list of stupid decisions that were taken throughout this process. Any bonuses handed out during this period that are not contractual should be refunded and any other payments deferred until such time as the banks are in better position to pay them. Let’s not forget that this particular bank is funded to the tune of several billion euros and has recently announced job losses that will far exceed 2,000 in number. Business ethics are taught in banking but very quickly forgotten.

Unfortunately, this story reminds me of Fred Goodwin, the former Royal Bank of Scotland Chief Executive who has been dubbed ‘the world’s worst banker’. In truth he probably rivals me and a few others for that title. Goodwin is remembered for his role in bringing the City of London to its knees. He received a salary of £4.2m in 2007 and was himself rewarded with a pension of £703,000 which was later reduced to £342,500. Having been forced to make an apology to the Treasury Select Committee he has recently returned to corporate life in Edinburgh as an advisor to a very established business group. It is said that he will receive a performance related bonus – mmmm, they should be safe then.

Where will the latest crop of bankers end up?

Who gives out these contracts? What other contractual arrangements are out there that we don’t know of yet? My own experiences will suggest that there are many.

In Ireland, we are told that the Department of Finance is looking into the matter. In January we were told that the Committee of European Banking Supervisors were set to announce new guidelines on the payment of bonuses. Last week, the Centre for Economics and Business Research announced that the rising salary levels in the UK were more than offsetting the fall in bonuses. The conclusion is that any new controls will be dated at inception and if they are not already being diverted will be overcome very shortly.

Bonuses, for me, have very quickly become the scapegoat for the latest set of financial crises. In many ways it actually suits the banks to have something to blame, and the ease with which the big banks accepted the Banking Commission reports in the UK suggests that it is already back to business as usual. Looking to blame bonuses as the root cause of the recent problems masks many of the risks in the system.

After the collapse of Barings Bank in 1995, many of my direct superiors took cases to the High Court to have bonuses paid. That gives you an idea of how aloof certain people within the walls of Finance think they are. Had they succeeded, I could have brought my own case. It doesn’t excuse my own actions but I know that I hadn’t done my job well, neither had they – but they still expected to be paid.

Deja vu.

Read more: Nick Leeson on how the Nyberg Report cannot just pay lip service to reform >