Proletarian Bankers Feeling the Capitalist Yoke

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange.
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Banks have long been oddities -- fiercely capitalist in their treatment of others, yet run like Marxist bastions where labor, rather than capital, captured much of the value created. (Just look at the share of revenues that went to employee compensation before the crisis, or the bizarre fact that, in essence, banks only adjust their balance sheets by borrowing more or less rather than issuing or retiring equity.)

This seems to be changing, thanks in part to tighter leverage limits. According to Bloomberg News, the workers' paradises are finally under assault from newly class-conscious capitalists. The rest of us should be pleased.

Leverage rules are meant to shield taxpayers from bearing the costs of bank failures and, by extension, take away the subsidies that enrich bankers and bank shareholders during the good years. Society as a whole benefits because crises become less likely and less costly, but those forced off their taxpayer-funded gravy train are stuck figuring out how to split the cost between workers and owners. So far, capital has borne the brunt of the new regulations with lower returns on equity.

While Wall Street employment is down about 13.5 percent from the pre-crisis peak -- and is still falling -- the attrition in the number of workers had meant that, until recently, those who remained could count on getting paid almost as much as before the crisis. Perhaps they were able to convince shareholders that return on equity would improve, or that cutting pay would lead to an exodus of "talent" that would reduce revenue.

Either way, the forces of capital have finally wised up to the tricks being played upon them by the worker class. Dividends and revenues are rising as pay packages shrink. Firms are now committing themselves to cutting the share of revenue that goes to labor. Some, such as Morgan Stanley, are deferring cash bonuses years into the future for the most expensive workers. Credit Suisse and UBS, the Swiss banks subject to some of the toughest capital rules in the world, have been cutting pay aggressively, as well as replacing cash bonuses with securities that promise to become worthless under a variety of circumstances.

So far, these cost-cutting measures have been insufficient to raise the return on equity for most of these banks above the single digits. Besides, capital requirements are probably still too low to ensure systemic resilience and fully remove governments' subsidies. If politicians and regulators decide to limit leverage further, shareholders will face even more pressure to reduce banker pay.

Ironically, capitalists crushing workers should reverse the broader trend toward increasing income inequality that has been driven in no small part by the soaring rents extracted by financial sector workers from the rest of the economy.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.