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Rubber-stamping Stephen Hester’s RBS bonus is no one’s idea of ‘popular capitalism’

The fact that, even today, the government is supine in the face of huge rewards for the elite reveals the hollowness of the prime minister’s recent rhetoric

George Osborne “understands the frustration with banking pay” – or so he said on Friday – but the alternative to handing Stephen Hester his not-quite-£1m bonus would, he claimed, have been “worse for the taxpayer”.

It’s an extraordinary argument. Presumably the chancellor is suggesting that if he had kyboshed the payout, Hester would have walked and taken the board with him, and the Treasury would have been unable to find anyone else to match their towering executive genius. Yet Osborne would only have been doing exactly what business secretary Vince Cable last week urged every shareholder in UK plc to do – hold Royal Bank of Scotland to account.

Though few in the City deny that Hester has done a good job in shrinking RBS and selling off its non-core businesses, he has also made thousands of staff redundant and overseen a collapse in the RBS share price to even further below the point that would see the taxpayer make good on its emergency investment.

Bank of England governor Sir Mervyn King (salary £305,000, bonus zero) sought to appeal to Hester’s conscience and his colleagues’ last week, pointing out that if rewards in the economy are hoovered up by a tiny elite, it undermines public confidence in the entire market system. “Those taking decisions on remuneration, in the financial sector and elsewhere, need to understand that a market economy rests not just on incentives, but on the acceptance that the distribution of rewards is fair,” he said.

But Hester’s bumper payday is definitive proof, if it were needed, that the City’s grandees have no conscience to appeal to – and that what seems “fair” to them is quite different to its everyday meaning.

It’s not entirely Osborne’s fault that he’s been left pontificating from the sidelines: part of the reason we got here lies in the actions of Osborne’s predecessor at Number 11. When the Treasury was forced to bail out RBS and Lloyds – against the background of shock-horror exclamations from Osborne that it was “nationalisation” – there was a determination by Alistair Darling and Gordon Brown that the government must not get sucked into the day-to-day business of banking. Instead, the arm’s-length body UK Financial Investments was set up to manage the shareholdings in the rescued banks and keep squalid details such as executive pay far from the red boxes of ministers.

Since then, the public have had to endure the bizarre spectacle of ministers “negotiating” with the bosses of state-supported banks over targets for lending to businesses, in the deal that became known as Project Merlin. That was followed by Osborne standing up in the Commons in November and announcing a new policy of “credit easing”, which would be overseen by the Bank of England, to pump loans to small firms. You don’t have to be a believer in seizing the “commanding heights” of the economy to think a government that owns more than 80% of RBS and more than 40% of Lloyds ought to be able to boost lending to businesses – and prevent a credit squeeze from choking off what little economic recovery we have – without turning to Threadneedle Street.

Even many City insiders, who tend to be knee-jerk Conservatives, argued at the time that they couldn’t understand why Osborne didn’t just order RBS to turn on the lending taps. And the fact that not a penny has reached a single business more than two months later, despite Treasury officials stressing at the time that it was a crisis measure, underlines how ill-thought-out it was. Osborne is scrambling to find a way of bypassing the banks, despite the fact that he owns a couple.

Watching Hester and his pals on RBS’s remuneration committee hold the government to ransom was a perfect example in miniature of the extraordinary grip the financial sector continues to have over the economy. The prime minister said he wanted to build “popular capitalism”. Getting a grip on Hester’s bonus would have been a great place to start.

Why Sky might fall

Pay-TV operators are under attack on many fronts, none more so than BSkyB, which will report first-half results this week.

The first threat is on content. Internet video rental services Netflix and LoveFilm are competing for pay-TV rights. They are snapping up films, with deals signed with the top six Hollywood studios – though Sky still dominates the so-called “first rights window”, for premieres.

Netflix, recently arrived in the UK, and LoveFilm, owned by Amazon, have the financial firepower to start bidding against bigger beasts for rights. And should Apple come along with a smart TV that doesn’t promote traditional channels over on-demand content, it could achieve lift-off.

The second threat comes from the Competition Commission, which is determined to unpick Sky’s monopoly on the first pay-TV window.

Sky as a broadband provider faces the third threat. Only BT and Virgin Media have fibre networks. Sky and TalkTalk have invested heavily in “unbundling” BT’s copper network, putting their equipment in local exchanges. This means cheaper wholesale prices, and fatter margins than if they bought the full service from BT and sold it on.

But the world has moved on, and the need for speed has arrived. Streaming films or catching up on Strictly in high definition requires 6 megabits per second. With copper broadband capacity nudging that level in the average home, it means only one user at a time. Busy internet households need 25Mbps and only fibre can offer it.

Sky faces a choice: it can pay the BT wholesale price (which is less regulated than for copper, and costs more – connection fee per customer is £80), or use BT’s ducts and poles to lay own a fibre network – an expensive gamble. So far Sky has ruled this out. It does plan to launch a fibre product using BT’s network this year. But higher fibre speeds will make live TV internet channels a possibility – and Sky’s dishes could suddenly look redundant.

Italian renaissance

Usually, investment advisers steer clear of Italian banks. Like most banks in Europe the only thing preventing their collapse is an implicit government guarantee, which makes them a poor bet. Not so UniCredit, Italy’s largest bank by value. Its shares are soaring. In fact it is the biggest stock market riser this year among the eurozone’s 50 largest companies. Only a few months ago it was on its knees. Told by the European Central Bank to boost its reserves by €9bn or risk going bust, it looked as though the liquidators in the wings would claim a big payday.

But that was before the ECB opened its €500bn credit facility, the “long-term repo operation”. UniCredit took the opportunity to park many of its dodgy-looking loans with the central bank in exchange for cash. All of a sudden its balance sheet was flush with notes and coins. Investors agreed to raise the necessary capital and are now sitting on a 67% share gain in three weeks – courtesy of the eurozone taxpayer. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds