Lots of governments have bailed out their banks. You couldn't say that a couple of weeks ago, but now it sounds almost commonplace. Most of the rescue packages, stabilization programs, deals with the Devil, call them what you will, contain several measures designed to deliver punitive slaps of varying degrees of severity upon bankerly wrists.
The British government, for instance, has been criticized for demanding a coupon of 12% on its preference shares as well as for banning dividend payments to ordinary shareholders -- thus driving some institutional investors to sell their remaining holdings and tempting banks to put repaying the taxpayer ahead of easing the credit crunch.
But few governments have dared to do as Germany has done. Berlin's stabilization package stipulates that banks that accept a government recapitalization must limit executive pay to €500,000 ($670,900). That's on top of a ban on bonuses and a curb on golden parachutes for failed bankers.
Perhaps the German pay ceiling is not as harsh as it might sound to other bankers. It won't put a crimp in household budgets in a country where hefty private school fees are virtually unknown (though there is a fashion among German bankers for sending children to expensive British boarding schools) -- and where even what realtors call "superprime" housing never developed the kind of bubble we saw in the U.K. or the U.S. It's also part of a package one opposition politician described as "soft as diapers" because of all the verbal hedging and escapes attached.
Not even Germany could ban massive severance payments if a multimillion-euro package is part of the existing employment contract. Nevertheless, a pay cap is a populist, banker-bashing move, which Finance Minister Peer Steinbrück, a Social Democrat, had to fight for in the face of fierce opposition from his coalition partners in Chancellor Angela Merkel's Christian Democratic Union.
Germany's large public and co-operative sector banking systems, though not unique in Europe, make it a special case among the leading financial powers. Bankers are used to a two-tier pay structure. Whether other governments could, or should, follow suit, is open to question. One obvious objection: Short of a revolution, no country is likely to nationalize all its banks. So for as long as strong private-sector competitors are ready to pay more, the best people will migrate to the money, leaving the state-owned banks with the second-raters.
The globalization of the banking system also means the top bankers can leave Germany altogether if public animosity toward fat-cat bankers makes life unpleasant. It would take an international banking agreement -- perhaps a Basel III, with binding ceilings on leverage, executive pay and bonuses as well as Tier 1 capital requirements -- to stop bankers seeking a return to multimillion-dollar remuneration packages as soon as the recession begins to ease. No chance of that.
But politics is not often about common sense or feasibility. Britain may have avoided caps on executive pay so far, but once the recession begins to bite, the pressure will be on. Prime Minister Gordon Brown, now reveling in his status as the superhero who saved the world from financial meltdown, knows that the first taxpayer-funded bank to pay its CEO a big bonus will punch a hole in his reputation. The U.K. is unlikely to impose German-style, statutory limits on executive pay, and the government will be wary of intervening publicly. But Britain's leaders are adept at using their City of London contacts. A word in the ear of the right board member, a quiet lunch with a City grandee, could be just as effective as a public intervention.
More worryingly, government-imposed pay caps could be the first step toward using publicly financed banks to influence lending policies. With an election scheduled for 2010, that temptation will be increasingly hard to avoid. And if the government then loses the election, despite using the banks as an instrument of social policy -- well, Brown and his ministers may be looking for highly paid jobs in banking only too soon. They'll be glad they cultivated the City.