It's ironic, then, that the first bank to go was Northern Rock, a conventional retail bank where, except for those at the top, bonuses were far from high. All businesses fail for one reason and one reason only: they can't pay their bills when they fall due. And the Rock was just the same. It funded its lending with customer deposits and short-term loans from other banks: when the banks stopped lending to each other in August 2007, The Rock couldn't fund its mortgage book.
Bradford & Bingley was in a similar plight. It too failed. Others hit by this liquidity crisis were saved by shotgun weddings: Alliance & Leicester with Santander; HBOS with Lloyds TSB; Dunfermline Building Society with Nationwide, Chelsea with Yorkshire; Britannia with the Co-op Bank. None of these had a high bonus culture; they'd relaxed their lending criteria without enough reserves for when the hard times came. These were classic bank failures, the sort that had happened every 10 years - every 10 years, that is, until 1878.
Curiously, Lloyds TSB might have sailed through the crisis. It had wanted to take over Northern Rock but Sir Mervyn King (then governor of the Bank of England) had refused to indemnify it against the Rock's £30bn overextended mortgage book. Instead, with government encouragement, it took over the much larger HBOS, but there was no time for proper due diligence. Lloyds' bail-out (£20bn) was really an HBOS bail-out subsidised by Lloyds TSB shareholders. They were sold a pup and paid the price.
But these are all mostly retail banks. All banks pay bonuses to most of their employees, but the really high bonuses are in investment banks. So did bonuses cause these, more risk-taking, banks to crash?
Strangely enough, when in mid-2007, the Bank of England called for an audit of structured lending and derivatives they found that UK banks held fewer than they expected. What was hitting the UK banks was not the first phase bubbling away in the US, but the aftershock when banks cut loans to each other.
RBS's demise was a masterpiece of bad timing. It stretched itself to take over ABN AMRO's wholesale operations in October 2007 - two months after the liquidity crisis had hit Britain's retail banks. Their lack of due diligence bought them more of the very assets that were at the heart of the primary banking crisis. Remember the Abacus products sold by Fab Tourre? One of the losers was ACA Management. When the swap became due, ACA failed to cough up and ABN AMRO had to pay out instead.
It wasn't bonuses that brought RBS down, but lack of capital for a high-risk bid. The chief executive, Fred Goodwin, was blamed (and rightly so) but its board could have blocked the bank grab. So could the regulators. So could the shareholders. So could the government. But they all chose not to. Alex Salmond even sent Goodwin a note saying "good luck with the bid, yours for Scotland, Alex".
Barclays was the bank with the really high-bonus culture. How much did these bonuses cost the UK taxpayer? True, Barclays had cash support a couple of times in August 2007, but that was swiftly paid back. Earlier that year it had tried to take over ABN AMRO but was saved by RBS who outbid it. A year later, it tried to take over a slug of Lehman Brothers and was saved by Alistair Darling who blocked the deal. And finally, just as the government was about to bail it out for £7bn, it found alternative funding (mostly from Abu Dhabi and Qatar).
This is hardly the stuff of sure-footed management and yet Barclays survived without a government bail-out, as did the better managed UK banks, such as HSBC, Abbey/Santander and Standard Chartered.
What all this shows is that banks are perfectly capable of getting themselves into difficulty without the help of big bonuses. The UK banking crisis was caused by ineffective bank regulation, partly arising from restructuring that happened 10 years before, and a liquidity crisis (so nobody would lend to the banks most in need of temporary cash).
Some of those responsible were paid large bonuses and some were not. But big bonuses had nothing to do with it for the simple reason that the really big ones were paid in a different type of banking - the exotic Goldman Sachs, Fab Tourre world light years away from the UK banks that went bust.
