Wednesday, 18 February 2009

Alistair Darling's big stick

I wrote an article recently on why the government couldn't stop the banks giving out bonuses to their employees lest they be seen to be exercising executive control over those banks, somethign which would bring the banks' liabilities onto the government's balance sheet. You can read it here.

Magically, to try and prove me wrong, RBS announced yesterday that bonuses were indeed going to be limited, largely to those people who were contractually entitled to them. This is being spun as the government putting the brakes on executive bonuses and finally bowing to demands that it leverages its majority shareholding in the bank.

As it happens, the decision to limit the bonuses was taken by RBS itself. The government didn't tell the bank what to do. How could it? The government doesn't exercise control over the board. What the government did do was pressurise the board and the board caved in. They board have stood by their original intention and paid bonuses in full, but they didn't. The question is, what leverage did Alistair Darling exercise over the board to get them to change their mind? What was his big stick?

The truth is that I think Darling's actually walking a tightrope. This is the closest that the government has come to exercising control over the bank since it took a majority stake in it. If he goes as far as to appoint a majority of board members, the Office of National Statistics will in all probability roll the entire bank into the national debt. Could it be that Darling played chicken with the board, threatening to let full nationalisation happen if they didn't relent on the bonuses? Quite a gamble...

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