Time to make bankers pay for their mistakes

Sometimes you have to admire the Australians. As the world celebrates the fact that the financial system is still functioning after last year's near-fatal heart attack, its leaders are planning to meet in Pittsburgh to decide on a cohesive recovery plan. An exception is Kevin Rudd, the prime minister of Australia, who apparently wrote to Barack Obama asking if the meeting couldn't be postponed so he could watch an Aussie Rules football match. Rather unsportingly, Mr Obama declined.

So for Mr Rudd's benefit, and for any bankers who think it's bonus time, let us begin by recalling the gravity of the situation. Soon after the banks had started failing, it was dubbed "the end of capitalism". Governments, who let's face it are invariably socialist, were called in to save the free market. They did so not out of an avuncular feeling for the pin-striped brigade, but because they feared that if the banks closed, businesses would follow and we would all be out of a job.

None other than Barack Obama, then a mere hopeful US presidential candidate with a handy turn of phrase and a ready smile, said last year that no money should be given to bankers unless there was fundamental reform of the system. Tim Geithner, the boyish US Treasury secretary, even wrote in the Financial Times the other day that the "regulatory framework failed last year" (few would quibble with that) and concluded that "strengthening capital requirements is an essential part of a broader effort to modernise our regulatory framework so that the financial system is strong enough to withstand the failure of large, complex institutions."

This is fabulously obtuse. Alan Greenspan, when chairman of the Federal Reserve, was famous for his delphic commentaries. Eventually commentators gave up trying to puzzle out what he was on about and just decided to buy whatever he said. This led to the longest bull run in history. That has now ended. Mr Geithner is not about to spark another bull run but would like a gentle recovery. What is he talking about? Banks should have more capital? Check. More regulation? Maybe. The failure of large, complex institutions?

There is nothing complex about banking. You lend money, either through loans or buying bonds, and hope you get paid back. You don't lend to people who won't pay you back. And you don't borrow short-term and lend long-term, because if interest rates move against you, you are history. A few institutions have learnt this lesson. In parts of Sweden they have instigated "church bell lending". You only lend to people who live nearby. You know them. You know where they live, what job they have, where they shop and what car they drive. You lend them money, because you think they will pay you back and you know where to find them if they don't.

But most financial institutions around the world, particularly in the Anglo-Saxon world, showed no such restraint. They showered the wrong people with money and then ran cap in hand to governments when they were about to go bust. I have nothing against bankers. Many of them are nice, unassuming people, kind to pets and congenial to have lunch with. I have nothing against them earning bonuses if they deserve it. But what none of them can explain to me is why these same bankers who bet the farm on a crop that failed should be rewarded. Not only should they not be getting bonuses, they should no longer be in a job.

John Thain, the disgraced former boss of Merrill Lynch, tried to justify paying colossal bonuses to bankers as necessary because they "are the talent". How much talent does it take to turn a thriving business into a US$20 billion (Dh73.46bn) loss? Surely any overpaid cretin could pull this off? The most successful oil trader in the world today is probably Agustin Carstens. He is the Mexican finance minister, who decided that oil's dizzy price hike last year was unsustainable, so he hedged all Mexico's oil exports for this year with Goldman Sachs and Barclays Capital. The gamble paid off, to the tune of $8bn. His reward? Probably just a kiss on the cheek from the Mexican president.

This would be one way to keep bankers in check. Another would be, as Barack Obama knew and Tim Geithner pretends to know, more regulation. The French and Germans are screaming out for it, although they shouldn't be trusted as they have no banks to regulate. Their idea of banking is more like a post office, with a teller who closes for lunch, doesn't open on Monday or weekends and prefers deposits to loans.

Clearly getting the balance right between too much regulation or too little is proving elusive. A good start would be to get rid of all those who got us in this mess in the first place. So far the only bankers to lose their jobs have been a couple of unlucky chief executives at Citibank and Merrill Lynch - although their pay-offs of many million dollars may have cushioned the blow. Everyone else has carried on regardless, while businesses go bust around them.

At some point all these government loans will need to be paid back. Who better to do that than the bankers, flush with cash? Now that would be a real bonus. [e-mail]