For those who think that Occupy Wall Street, the Indignados in Spain, the World Social Forum and the hundreds manifestations of protest worldwide, are expressions without concrete outcome, the result of the Swiss referendum on capping the salaries and bonus of banks' executives, should make them think twice.

 

Like it or not, Switzerland, not exactly a revolutionary country, with a two thirds majority has given the right to decide salaries and bonuses of the executives of financial institutions, to their shareholders, and not to the banks boards, for their cozy mutual enrichment. Another referendum is due shortly on capping the salaries and bonuses of executives of other companies of all sectors, to a limit not exceeding 15 times the average salary of their employees. This is an interesting development. In 1950, an American financial manager, Baruch, theorized on the possibility that an executive could have a salary 50 times higher than the average of his employees. A big scandal ensued.  Now, in the Fortune 500 list of the most important companies, that difference has grown to 545 times.

 

At the same time the European Commission and the European Parliament have reached an agreement on capping the bonus of the banks' executives equal to their annual salary. If the shareholders so decide, it can be double that, but no more.

 

The howling of the bankers, while expected, is very interesting due to the basis of their rejection. The first reason, coming basically from the UK, is that this increases the gap between London and Europe. The financial sector makes 10% of the British GNP, and the Anglo-Saxon world has been riding the waves of increases in bonuses and salaries of bankers much more than elsewhere. In a good year, a bonus can be 10 times higher than a salary. But it is a fact that the UK is moving, as the last local elections have been showing, toward an increasingly anti-European sentiment anyhow, and Europe will never become more integrated if London keeps on applying the brakes all the time. So the financial sector is not the main theme.

 

The second reason for rejection is more interesting. They say that the result will be higher fixed salaries, which would hurt more shareholders, and the high bonuses are more flexible. Then good executives would move to Wall Street, or Hong Kong, Shanghai or Tokyo, and Europe will be left with second class executives. Now, it is widely know that high bonuses reward risk taking, which is one of the causes of the dismal performance of the banking system, and this argument ignores that there is a growing consensus on the need to go back to the pre Clinton era, when deposit banks and investment banks were separate (and there was never a such dramatic crisis as the present one), precisely to reduce the high-risk culture which has led to a system that has increased unemployment and poverty worldwide. It suffices to see the unremitting cascades of fines for frauds and mismanagement that banks had to pay following this ill-fated Clinton decision.

 

The third argument is the most interesting, and shows how much the world of banking has grown into its own delusion. Bonuses are mostly given in the form of a “claw-back” bonus; they are deferred and often paid in form of stocks, and they can be retracted. The big banks, like the Royal Bank of Scotland and Barclays, have used claw-backs, and bankers say that this threat has itself become a powerful deterrent to risky or unethical behaviour.

 

Now, no data are available on how much this claw-back has been used anywhere. What are available are the innumerable fines that have been applied to the big banks for fraud. It suffices to remember that the very lenient American regulators have given more than 3 billion dollars in fines to the big banks. Let us just recall some, all considered a mere slap on the wrist by the experts: 8.5 billion for fraudulent foreclosures on home loans to ten banks (including Bank of America, Citigroup, JP Morgan Chase), followed by a similar settlement for 557 million dollars to Goldman Sachs and Morgan Stanley. The case of the fraudulent fixing of the Libor rate (the rate of exchange among banks) has cost up to now, just to the UBS, 1.5 billion dollars.  The director of Barclays has been obliged to resign. Where it is the effect of the claw-back cause as a firewall against risky and unethical behaviour? British authorities have now recommended regular oversight of Libor, as well as criminal charges against individuals trying to alter the rate for financial gain. HSBC has recognised that it has been laundering money from the drug cartels of Mexico and for Saudi banks with ties to terrorists groups.

 

The best way to understand how bankers have grown to a different mindset has been offered by the CEO of JP Morgan, the famous Jamie Dimon, defender of the banking system, who attacked everybody in the last World Economic Forum (until when will you criticize bankers?) who in the yearly meeting with its investors few days ago in New York, gave the answer, as a conclusive argument in a debate with a known analyst, Mike Mayo: “that's why I'm richer than you”.

 

So it should not cause any surprise that Maurice Greenberg, the former CEO of AIG, has now opened a lawsuit for 25 billion dollars against the government, accusing it of “extracting” a punitive interest in the bailout plan which saved AIG from bankruptcy, of 14%.  The government had to inject 182 billion dollars to save AIG, one of the largest mortgage insurers, after the housing bubble burst in 2008. Let us recall that this was the beginning of the Wall Street crash, which was the detonator of the present world financial crisis, which has created 100 million new poor worldwide, according to the UN. That crisis, which was entirely engineered in the United States, coupled two years later with the crisis on sovereign debt, an entirely European affair. This has led to the unprecedented blackmail of governments by the market, to the uniform medicine of austerity, with Greece as the clearest example of its impact on people. Mr. Greenberg resigned, without any punishment, and now he is asking for 25 billion dollars, for the harsh conditions imposed by the government to save AIG…?

 

This well illustrates the relations between authorities and the financial system. We have the certifying companies who certified that AIG and Goldman Sachs were sound institutions: the same ones that now give triple A or not to governments, in spite of the fact that they looked the other way.  And the regulators?  The SEC, the American regulator, by and large, goes by the following philosophy: let us settle cases against financial wrongdoing, without them admitting or denying the findings. The practice, they contend, helps the SEC and other agencies to avoid costly, time consuming litigations. Quick settlements, rather than long trials, mean victims get restitution faster. And there is always the possibility that SEC could lose in court.

 

But here is a good example: it is a very complex affair – for the full story go to the NYT of 19th February, page 18. But the substance is that AIG sued Bank of America for fraud, for 10 billion dollars, relative to the days of September 2008, when AIG was close to death. The case went to court. And then the Federal Reserve Bank (from which the ex Treasury Secretary, Geithner, comes) made a deal with Bank of America for a settlement of 43 million dollars, giving statements to the court that exonerated Bank of America in the case. A New York Fed spokesman said it supported the settlement because it would generate significant value without potentially high litigation costs.

 

Jesse Elsinger, from ProPublica, a nonprofit news agency, published in the same NYT edition an amusing but discomforting story on the revolving doors for regulators at all levels. It starts with Mary Jo White who Obama has appointed as the head of SEC. She spent the last decade serving so many banks and investment houses that she will have to excuse herself on so many cases, that she will be able to litigate only with minor entities, like First Wauwatosa Securities. And now, Senator Reid, the Democrat Majority Leader of the senate, has taken Cathy Koch onto his staff as chief adviser for tax and economic policies. She comes from general Electric which, under her expertise, paid almost no taxes.

 

The Office of the Comptroller of Currency, or OCC, has a new boss, Thomas Curry, less linked to large banks, who fired the outgoing chief counsel, Julie Williams. She promptly landed at Promontory Financial, a shadow OCC of the private sector, founded by a former head of the agency, Eugene A. Ludwig. Promontory provided the bulk of the staff for the Independent Foreclosure Review, that the SEC and other regulators set up to evaluate how the big 10 banks played a role in defining an action on how to compensate the victims of the housing bubble. Their idea was to let the banks establish the facts. Result: before the settlement for 8.5 billion dollars that we quoted before, the IFR had to be disbanded, because it failed to reach any result, but not before paying 1.5 billion dollars to the consultants. And who has replaced Julie Williams as chief counsel at the OCC? Amy Friend, who comes from Promontory Financial…

 

And we now have a new Treasury Secretary, Jacob Lew. What was the declaration on the vote for his approval in the senate by Bernie Sanders, an independent from Vermont? "We need a Treasury Secretary who is prepared to stand up to the enormous power of Wall Street. Do I believe that Jack Lew is that person? No, I do not”.

 

And the problem is that the private sector is more and more mimicking the financial sector. When Don Bailey took over Questcor, a drug maker; he raised the cost of a specialized anti-inflammatory drug, Achtar, from 50 dollars for a vial to 28.000 dollars. When he was asked if the price could not come down for those who could not afford it, Bailey answered "if I do this, I can be sued by the shareholders, for limiting their earnings”…

 

It is therefore appropriate that in the American prisons a new training program has started: the Prison Entrepreneurship Program, which has already graduated 800 convicted felons. It is a six month course run by former executives and voluntary students of MBA, and teaches how to start a business and run it. It has over 2.500 applicants every year, for just 150 places. It is a success story.  Graduates do so well in the business world that only 5% go back to prison. Maybe it should plug into the revolving door system that we just described…

 

But more obscene is the news that the 100 richest people in the world ADDED to their wealth, in 2012, 240 billion dollars. Clearly, they had no need of that money, in human terms. The top 1% of the population (60 million) now has wealth equal to that of 2 and a half billion people. And in the last ten years, this concentration became even more extreme. The top 0.01% (600,000 people) have wealth equal to that of two billion people.  There are now 1,200 billionaires in the world. And we are facing a serious food problem. Every day there are 219,000 new mouths to feed, 70 million every year. According to FAO, the reserves of food have gone down by 2.6%, while the cost of food keeps going up (cereals by 10% to 35%, depending on the product). Yet, according to the World Bank, in the rich countries we throw away 40 % of food. With the $240 billion piled up in a year by those 100 richest people, we could eliminate many of the world problems…

 

Anyhow, there are 2 billion more people coming up in a few decades (2050). The system is not able to accommodate our 7 billion. How it will accommodate 2 billion more, coming from the poorest parts of the planet?

 

Well, the answer is obvious: we have the wealth, but it is not distributed justly. And the rich become richer, and the poor poorer, as everybody says. And, to go back to the beginning of this article, too short to be serious, people are getting fed up, as the Swiss referendum has clearly shown. Everywhere discontent is seeping into the polls, with protest parties flourishing everywhere. Beppe Grillo, in Italy, is just the last warning. We are in transition to a different system. This can be done in peace and cooperation, or by continuing in this growing social injustice. History has many lessons on this issue, and it is useless to recall them. We all read them at school, so do the 100 billionaires… So, as the Swiss referendum shows, it is not the awareness which is lacking: is our political representation…