Bash the bankers? OK, but don't forget splitting them!

Judging from the excited cackling pervading every media, from the blogs to the tabloids, it certainly appears that Mr. Darling, the UK Chancellor, has set some kind of aggressive feline loose among the pigeons.

Pointless as it might be, here are the haruspex summary of the situation, and humble views, having read the opinions of more illustrious commentators, discussed with learned friends.


The incident
What happened? Well, some of our ex-UK readers might not have heard, as incredible as it might sound to city types. So: the UK has introduced a special, one-off, ADDITIONAL tax on this year's bankers' bonus, of 50%. That is to be paid by the employer. After that, the employee will pay the normal income tax.
France is following suit, Mrs. Merkel has declared the idea "charming" (did she mean "fascinating" or "quirky"?).
Who exactly falls in the net is still being clarified. For example, asset manager that belongs to banks seem to be excluded (why, one wonders... by belonging to banks, they still enjoyed the indirect support of the taxpayer)
According to some, the tax as announced will be fairly easy to circumvent, and a lot of opinions have already circulating on how to evade it.

The haruspex views
Yes, of course it is a populist measure. But so what? it can be populist and appropriate at the same time.
It shouldn't have been needed: but it is.
In the banks it is business as usual: 2009 was a profitable year, so record bonuses were being prepared. Disregarding the fact that 2009 was profitable because of the exceptional stimuli and QE, not to mention that none of the large banks (apart from possibly JPM) would be solvent now without the interventions at the end of last year.
The point of putting the banks in a situation to make easy money was to strengthen their reserves, while we have recently learned that the risk adjusted capital ratios are more or less as bad as they were, and that only ~half of the losses due to toxic assets have been taken up to now.
Despite this, several tens of billions were being earmarked to pay bonuses.
It is a very simple argument, but it seems lost to many bankers. In fact, a lot of Orwellian rewriting of history is already started (e.g. Goldman mantains that they were fine, really... wouldnt have gone to the wall at all, even if the US government hadnt made them good over the AIG billions - sure).

The only rational argument that the pro-bonus lobby can give  is that "one needs to retain talent".

To which:

•  what talent? the amount of incompetence was, and is, staggering. let's not forget that all this talent managed to concentrate risk in enormous size (pacem the FT), misunderstand, misprice and mishedge toxic derivatives,  extend incredible leverage to the worst type of credit risk, etc...
•  where will all this talent go? hedge funds are pretty full right now. european banks will follow suit. US banks won't be able to hire everybody will they?

In short: this tax is welcome. Pity that it is probably badly done from a technical point of view, and that there is n't international cooperation.

But a one-off tax will remain just that. To address compensation, a few more measures would help:

1. force the publication of every compensation package above a certain size, (say 10 times the national average), in whatever industry
2. forbid the payment of any discretionary sum, be it a bonus or a dividend, in any fiscal year where the firm is increasing debt (to avoid private equity shenanigans - though some more accounting details are needed)
3. require shareholders approval of compensation policies

The fact is that compensation, per se, is not the major aim. It would follow, if one addresses the serious issues:

A) changing the marking policies of illiquid assets, especially complex derivatives. Current practice is to mark-to-model, which creates fictitious profits upfront, out of which large bonuses are then paid. Change the marking policy by not recognizing the profit until it is realized, and you cure not only the bonus issue, but much more importantly the short-term, go-for-broke risk appetite that allowed the accumulation of huge risks and consequently losses.
The marking policy is of course inextricably linked with the discussions on reserving policies currently taking place.

B) split the banks, not just Glass Steagall, which was commercial banks and broker/dealers, but along functional lines. By splitting, they become smaller, and hence can fail. Guarantee only  utility banking (payments, clearing, settlements, current accounts). Do not believe when the bankers and their lobbyists say that it's too complex to do: most banks are already split internally along those lines.

Surely there are a few other measures that could be taken... time to snooze now though.
And sorry for the serious tone, and the lack of pics.