Inside job

The government’s review of banking bonuses may be cynically timed, but it is not, as some have suggested, a cover-up. David Cameron is right to question the sense of ploughing £20bn into an industry that’s mis-firing on all cylinders, only to give five per cent straight back to the morons that got us into this mess in the first place. But Brown’s intention is not to screen the public from the truth.

The review, which will be led by former Morgan Stanley chairman Sir David Walker, was announced three weeks before RBS, now 68 per cent controlled by the government, is due to release its results. They won’t be pretty. But bonuses will be paid (according to the contractual small print) no matter how badly RBS does. Brown and Darling will use the Walker Review to deflect some of the inevitable flak.

Cynically timed, then, but not a cover-up, as Vince Cable and Robert Peston have suggested. The review will have a specific goal: to find a new way of structuring City bonuses so that they encourage the long-term health of the banking sector. Risk will still be encouraged, but it will be responsible risk, whatever that is. With the review target so clear, it’s difficult to see how it could be construed in any other way than as a very real attempt to shore up the weakest links of the City machine, without damaging its potency in the process.

Sir David is indeed an insider—and it’s his apparently cosy appointment that has enraged the conspiracists—but outsiders have thus far proved themselves incapable of penetrating the complex idiosyncrasies of high finance: both the financial journalists and the banking non-executives failed to ask the right questions at the right time.

Besides, those doubting Sir David’s capability need only refer to his last public review of 2007, which set out to bring transparency to the mysterious and much-despised private equity industry. In some ways, the two reviews are similar: open up the hood, appease the public, but don’t neuter the defendants in the process. Some of the private equity industry’s most secretive boards have already begun to release details relating to performance and strategy. But last month’s report by Ernst & Young, the first real data to emerge from a newly transparent industry, has revealed perhaps even more than even Sir David bargained for.

According to the Guardian’s spin on the report:

“More than half the profits generated by UK private equity firms in recent years have been made by piling debt on to the books of the companies they invest in… Just one fifth of the returns achieved come from strategic and operational improvements.”

Confirmation, if you ever needed it, that private equity is about short-term profits, not organisational efficiency.

What gems will Walker’s investigation into banking bonuses uncover?