Banks Bailed Out -- But What About Fat-Cat Bonuses?

The status switch at Morgan Stanley and Goldman Sachs marks the end of an era on Wall Street -- and the most "sweeping intervention in financial markets since the Great Depression."

"Now that the US taxpayer is in a formal sense underwriting Goldman and Morgan Stanley, their days of buckling the swash on the worldwide high seas of finance are over, possibly for good," writes Robert Peston.

Ceding to fears that they couldn't survive much longer, the two investment banks sought safety under the Federal Reserve's wing -- in a statement, the Fed pledged "increased liquidity support" to the two banks during their transition.

They will now be able to raise money by creating commercial banks that take deposits. They are also subject to the Federal Reserve's stricter regulatory regime and are likely to lose out on the massive profits that came with highly leveraged deals.

But they have access to the Fed's largesse, itself considerable. The Fed is stumping up $700bn to buy out bad loans (euphemistically called "troubled assets") in a move welcomed by the markets but questioned by economists -- Paul Krugman's just one who sees big holes in this plan, not least the questionable value of these bad assets.

Is this a hint at what we could expect in the UK? Unlikely, according to the Treasury -- but it has extended the Bank of England's Special Liquidity Scheme to January 30, 2009. This is a £100bn fund that allows banks to swap untradable mortgages for gilts for up to three years. Overall, though, the government's "piecemeal" approach seems to be working, argues the FT, and it's got some experience under its belt since Northern Rock.

But Ambrose Evans-Pritchard fears for Europe, where "embedded paralysis" in its laws preclude a swift, Paulson-like decision. In the UK, regulatory reform of some kind is highly likely as the "extraordinary turbulence" of the markets is such a key political bargaining chip. Chancellor Alistair Darling has asked the FSA's new chairman, Lord Turner, to assess where the financial system in the UK could be improved.

Turner himself is ready to crack the whip on fat-cat pay: "Regulators need to ask questions of institutions as to whether they are paying out bonuses before they are sure whether the profits are really there and whether there has been a toxic problem created for the future."

Cass Business School's Andrew Clare's among the sceptical, calling it "intervention on a ridiculous scale" as well as crowd-pleasing spin. "While the banks remain private companies, it's down to the shareholders to vote against bonus structures."

True. But if we follow the sort of demands outlined at The Crone Speaks or by Richard Murphy in return for our support of the markets, we'd be demanding a seat on the board. Or more than one. Realistic, no. But it's a nice idea.