Breaking the Bankers?

The plot of the morality play set in motion by the United Kingdom’s announcement of a 50% tax on bankers’ bonuses has now taken form. And it is a play that holds an important lesson about how politicians are managing – or mismanaging – demands for financial reform.

British Prime Minister Gordon Brown and French President Nicolas Sarkozy, once at odds over Sarkozy’s criticism of Anglo-Saxon capitalism, have reconciled: predictably, France followed Britain with a bonus tax of its own. Equally predictably, the UK banking community responded by playing the “we’ll take our marbles and go home” card (“home” meaning New York, Honk Kong, Zurich – anywhere but London). A Bank of England executive then responded with the “good riddance” card, saying that, “given the costs of carrying that financial system around, it may be a price worth paying.”

Now that the story is clear, it is useful to take a step back and view the events from a strategic perspective. For, if the players in this drama are not currently acting strategically, they will end up doing so, and it is useful to see where that will lead.

Consider first the structure of the British bonus tax. It is levied on the banks, which are free to pay both bonuses and the resulting tax. Moreover, it is a one-time tax, expiring in April. In essence, the UK has imposed less a tax than a fine for the banks’ arrogance in ignoring public anger.