There's an urban legend about FBI agents finally cornering the renowned bank robber Will Sutton after a chase lasting years. "Why do you rob banks, Willie?" one asked. "Because that's where the money is," he answered.
- Taking stock / Can the little man win?
- Taking Stock / Lapid let us down
- TA stocks recover from early lows, led by banks
61 years after Sutton's capture, the global banking system has attained monstrous proprtions, and so has the power and pay of the financial elite. What Sutton did at gunpoint, tens of thousands of bankers are doing legally (for the most part): They are taking money from people. Billions of dollars from millions of people.
Even though the power and pay of the banking caste has been growing as a rising monotonous function since Sutton's day, something is changing after all. The people are waking up.
Social movements, from Occupy Wall Street in New York to the social-justice protest in Israel – culminating last week in a decision by Israel's banks watchdog, David Zaken, to intervene like never before in executive pay at the banks.
Pay at Israel's banks had to comply with the norm in world markets, Zaken said. Namely, it should reward excellence - while being structured in a way that deters excessive risk-taking.
Zaken's decision to cap executive pay at the banks teaches not only about the power of the people, but about rhetoric and policy at the Bank of Israel, the Finance Ministry and the other financial regulators in Israel, which was skewed at best and manipulative and evasive at worst.
All these years the regulators deflected criticism of banker pay – "It's up to the board of directors." The implied assumption was that the bank boards were independent, devoid of hidden interests, sovereign, powerful and professional, with nothing but the greater public good in mind.
That wasn't true, as the scandals of recent years have shown. Directors don’t want to clash with the managers of the banks, so they can stay in the financial club. Zaken is admitting that he knows directors aren't using their discretion properly even when the issue at stake isn't the bank's stability. He's admitting the regulator had to get involved.
His move should be the warning shot in a campaign to reform the banks, a reform far broader than merely capping bonuses. But first people need to see the big picture.
1. The bloating of the banking system isn't an Israeli problem, it’s a global one, which is why it's hard to contend with. We imported twisted norms from the West, and the sickest in the West is the U.S., where the financial system has created yawning inequality and has terrifying political power.
The American financial system is responsible for 8% of America's GDP and 30% of its corporate profit. Banks gobble up the lunches of whole industries and in exchange belch financial crises, fraud and zero-sum gambles that enrich only themselves.
Israel's banking system hasn't reached the monstrous proportions of the American one. It's less sophisticated and more concentrated. But it wants to emulate the American system in the way it pushes credit onto households, in executive pay and in pulling political strings.
2. Two years ago a bunch of bankers badly wanted to be chosen to lead Bank Leumi. I asked three of them if they'd still want the job if the board cut the salary to 20% of what the outgoing CEO, Galia Maor, had made. They grinned in embarrassment and said, "Of course." Then I asked if they're agree that a80% pay cut for the CEO would help them restrain spending by the bank, including on the cost of hidden unemployment (meaning the bank has more workers than it needs – a huge problem in the Israeli banking system). Again they wriggled: "Obviously."
Obviously, none of that happened. The top people at Israel's banks wil continue to gross anywhere from NIS 2 million a year to NIS 8 million, and to keep the troops in line, totally superfluous workers stay on and on and on. They can do this because of the cartelistic structure of the market.
Are bankers' salaries a result of the market? No. No Israeli banker ever got a real offer from an international bank or giant multinational company. Any offers came from local companies. Citibank, Goldman Sachs and Barclays haven't sent headhunters to comb the Holy Land for talent.
3. The public hates the bankers' bloated pay, so the finance minister and banks supervisor feel well positioned to launch an attack now. It is clear that their inflated salaries preclude the bankers from attacking waste at their institutions. But what Zaken has mumbled, with his back to the wall, and what Finance Minister Yair Lapid doesn't want to say at all, is that below the 50 or so top bankers earning top pay is a whole caste of 10,000 to 20,000 people, bank workers, soaking billions from the public each year through their inflated pay.
Most of the anger against banker pay is from the gut, not the brain, so people look askance at the 50 bankers siphoning off some tens of millions, not at the NIS 5 billion a year that the banks' superfluous manpower costs them.
Zaken's move followed a process of the public coming awake, and demanding information about the banking caste. The Bank of Israel dragged its feet on disclosing figures and when they were finally published in TheMarker, it became clear why. More than a third of bank workers – tens of thousands of people - cost NIS 30,000 to NIS 100,000 a month. And most of them have tenure, too, which is worth the world. [link]
In other words, low-ranking bankers earn 5 to 10 times the average wage.
4. How do the bankers warrant this extraordinary pay, plus tenure? Do they invent new technologies, do they innovate, do they conquer new markets?
Israelis tend to be in awe of bankers but the truth is that most of the banks' profits derive from households and small businesses. Israel's banks, which never did succeed in their overseas forays, are much like the Israel Electric Corp or any other big public monopoly: They provide basic services to captive clients. The banks' enormous wage cost, which doubled over the last 15 years, is a factor of the size of the pie they can grab thanks to economic concentration and entry barriers.
5. Whose fault is it? David Zaken's, and his predecessors. They have concentrated on the stability of the system, ignoring its competitiveness. They know the banking industry is hugely over-staffed. That's why instead of breaking down barriers and encouraging new competition, or Internet banks, they raise barriers – by omission or commission – before competition in the banking industry.
Reforming the banks could save the Israeli public some NIS 10 billion a year, twice its savings from the reform of the mobile communications industry. But the banks are so big that not only can't they be allowed to fall – nobody wants to touch them. The watchdogs are afraid. They'd rather hunker down on their pork barrels and not raise a ruckus.
6. The high degree of concentration at the banks, the absence of competition, the huge market share of the two big banks Hapoalim and Leumi and the gigantic wages made by thousands of people making up the banking caste – these are not unique problems. The banks are just one group gouging Joe Israeli. Ostensibly the groups are there to serve the public; but if they're serving anybody, it's mainly themselves. That's the real reason why nobody wants to touch the banks and root out the problems – they're just one of many such groups, and too many people like things the way they are.
Change at the banks can only come if there is political will to touch the powerful interest groups. The difficulty is that small cliques have info, power and the ability to organize in order to preserve their privileged position. The greater public has no such organizational ability. But only a broad-based, professional and sustained effort by the public can bring change to Israel's banks, to the defense establishment and to the other interest groups. David Zaken's move should give us hope as to the strength of public opinion, but the process will be long and complicated. And if it succeeds, we can indeed be a light unto the nations.