No place for mega salaries in new era of bank protection

Restricting salary would curb performance, at a time when performance was crucial. It was a reworking of the old "if you pay peanuts you get monkeys" argument.

There has been little debate about corporate salaries here since the global financial system melted down, mostly because all our big financial institutions have remained resilient to the forces battering the capitalist system.

The collapses have been concentrated either at the racy end of financial planning or among the highly geared boom-time operators like Allco, Babcock & Brown and Centro Properties.

But the US President's decision to restrict salary as a condition of those accepting aid is something that could and should be considered in Australia. For our big financial institutions have been fiercely protected by the Federal Government, by taxpayers like you and me. And nowhere is this more apparent than at Macquarie Group, the company that revelled in its reputation as the "millionaire's factory" and took kudos for paying the biggest salaries in the land.

Allan Moss, the previous chief executive, and Nick Moore, the current boss, are the only two Australian corporate leaders to have cracked the $30 million a year pay bracket, even though the company has never been anywhere near the biggest or most profitable company in the country.

Moss has gone. And Moore this year has indicated salaries will be cut. But it will be a measure of just how far removed from reality Macquarie really is when it releases its annual report in a few months' time.

It is almost certain Moore will be paid a multimillion-dollar salary in a year when taxpayers have propped up his organisation and when shareholders have suffered a 70 per cent fall in the value of their shares.

The Macquarie story could have been very different. Back in mid 2006, as debate raged across the empire about the best way to plunder financial markets, there were serious considerations about whether or not the group should bother with a banking licence at all.

All those rules and regulations were holding the organisation back. Prudential requirements, monitoring by the Australian Prudential Regulation Association, and the Reserve Bank on top of the normal palaver from the Australian Securities and Investments Commission and the Australian Securities Exchange was making compliance a nightmare.

It hardly seemed worth it. After all, the real money was to be made outside of traditional banking and the prudential regulations meant that valuable capital was being locked away that could otherwise be used for far more profitable ventures.

And anyway, a number of big investment banks offshore didn't need banking licences. Take Bear Sterns or Lehman Brothers, for example. Ultimately, wiser heads prevailed and instead, the company split itself in two, with a traditional banking business and an investment business sitting beneath a holding company.

The banking licence was retained and right now, it is that licence keeping Macquarie's bilge pumps operating quickly enough to keep the operation afloat. And it is a gift from Australian taxpayers that is providing the power for the bilge pumps.

As a bank, Macquarie has been the beneficiary of the Federal Government's decision to provide a guarantee over bank deposits and their borrowings offshore.

That guarantee is money in the bank, if you'll excuse the pun. What it has done is pave the way for our banks - including Macquarie - to raise money offshore and to raise it at a far cheaper price than it otherwise could have.

This has been a godsend. In the past few months, since that guarantee was granted, Macquarie has raced onto offshore debt markets to secure about $10 billion - money it may have had difficulty accessing and money that would never have been available to it at the price at which it was raised.

So what's the problem with that, you ask. Taxpayers haven't actually kicked any money into the Macquarie coffers.

Technically that's true. But that guarantee comes at a cost because it carries a risk. And the risk for Macquarie is higher than the risk for the big four banks who also benefit from the guarantee. Macquarie was rated as A grade by most of the credit ratings agencies.

While the agencies' usefulness and performance is worthy of another column, let's just say they correctly calculated that Macquarie's risk was higher than the big four's, all of which were rated AA.

The Federal Government is rated AAA and it is that rating that has been conferred on all our banks courtesy of that guarantee.

That's not the only leg-up given to Macquarie. It is one of the main beneficiaries of the ban on short selling in financial stocks which, when you consider for years it has been actively short selling shares in other companies, is a bit rich.

This week, Macquarie wrote down another $900 million worth of assets, taking total write-downs to $2 billion this year and conceded profits would halve. As a result, the executive share of profits will be way down, the group said.

Way down from what, though?

Executive remuneration is only partly about paying the mortgage and putting food on the table. Once in the multi-millions, it becomes a competition, a statement about where you stand in the pecking order.

For the upper echelon at Macquarie, it reflected an arrogant, unwarranted and ultimately deluded belief they were intellectually and socially superior - but not too proud, it seems, to be propped up by taxpayers.