From The TimesFebruary 10, 2009

Labour can’t control the pinstriped puppets

Taking over the banks was one thing but running them is quite another. Public anger will soon turn on ministersRachel Sylvester

In the 18th century, there was a parliamentary resolution calling for bankers to be tied up in a sack of snakes and thrown into the Thames as punishment for the South Sea Bubble. MPs on the Treasury Select Committee may not go quite that far when they grill Fred the Shred and friends this week but there is a similarly antagonistic mood at Westminster.

Bankers who helped to create the credit crunch are in the modern equivalent of the stocks, with politicians queueing round the block to throw rotten tomatoes.

Gordon Brown was said yesterday to be "very angry" at the decision by some banks to award billions of pounds in bonuses to their senior executives. David Cameron declared that financiers should "wake up and smell the coffee" about their role in the economic crisis. John Prescott is recruiting an "online army" to storm the barricades in the Square Mile. Hazel Blears wants the testosterone-charged risk-takers replaced by women. Vince Cable says - only half in jest - that it is time to "bring back the guillotine" for the City slickers who have brought the country to its knees.

There is no doubt that banker-bashing captures the public mood. The Masters of the Universe look spectacularly out of touch as they pay themselves lavish performance-related rewards just months after accepting a taxpayer bailout that stopped them going bust. They talk about contractual obligations - but I don’t imagine the contract included a clause on making their companies dependent on the State. When America, France and Switzerland have announced a pay cap for bankers who take government support, it is hard to argue that there is a global market in super-pay for the super-rich.

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People are trying increasingly to bypass the banks because they mistrust the bankers. There has been a huge surge of interest in alternative financial services - Zopa, a company that lets individuals borrow from each other online rather than from a bank has seen a 743 per cent increase in the number of lenders in the past year. The sense of hostility to the have-yachts will only intensify when the unemployment figures are published tomorrow showing a large rise in the number of have-no-jobs.

It is easy for the politicians to ride the populist wave - but they should be careful. The anger that the voters feel towards the bankers will soon transfer to the ministers who seem increasingly to have lost control of events. The Government now owns large chunks of the banks - but seems to have little power over what the institutions do. It does not help that Whitehall is gradually morphing into the City, with the bankers recruited by the Treasury themselves in line for bonuses.

The Chancellor promised that there would be "strings attached" to the taxpayers’ money spent on recapitalisation - but it now appears they were tied only to the Whitehall end, leaving the pinstriped puppets free to run wild. The announcement this weekend of a review of bank remuneration packages is a political stunt designed to divert attention from the bonus season rather than a serious attempt to change anything.

There are already two reviews underway that will cover the issue - including one by Lord Turner of Ecchinswell, the chairman of the Financial Services Authority. The decision to kick the issue into the long grass is in stark contrast to Barack Obama’s decision to act. Mr Brown may be the first British prime minister to find himself under pressure from a US president to shift to the left.

In truth, of course, the real issue is not the bonuses - it is the way the banking system was allowed to get out of control, putting the whole economy at risk. It reminds me of the BSE crisis in the 1990s - when mad cow disease got into the food chain because nobody realised that animals were being fed a load of packaged-up junk.

Instead of CJD spreading through cattle herds, we have CDOs infecting first the banking system and then the wider economy. Mr Brown’s decision when he was Chancellor to appoint Alan Greenspan, the deregulator in chief, as an adviser is the equivalent of John Gummer feeding a burger to his daughter live on television

But there has been no economic version of the ban on beef on the bone. Instead of talking, ineffectually, about bonuses the Government should be forcing the banks to separate their high street operations and their risk-taking investment arms in order to make sure that consumers never again find themselves unwittingly involved in a high stakes game of poker.

Labour is like a rabbit caught in the headlights of the City. Unlike Tony Blair, Mr Brown is not personally attracted to wealth but he is politically in awe of the wealthy. A key part of the creation of new Labour was the repositioning of the party as being on the side of business rather than the unions.

Senior figures spent years on a "prawn cocktail offensive", culminating in Peter Mandelson’s declaration that Labour was supremely relaxed about people being "filthy rich". As Chancellor, Mr Brown appointed his key ally Ed Balls as City Minister, to schmooze the suits; as Prime Minister he set up a business council to prove his commitment to the Square Mile.

Although the Tories have nothing to lose and everything to gain by bashing the bankers because it goes against the political grain, Labour is divided about how to deal with the crisis in the City.

Lord Mandelson, the Business Secretary, was less than pleased when Lord Myners, the City Minister, launched an onslaught against the "grossly over-rewarded" Masters of the Universe last month. "A key part of new Labour was to recognise the importance of wealth makers," a government aide says. "The big tactical error would be to unleash a lot of anti-banker rhetoric."

The real problem, though, is not the rhetoric but the reality that ministers cannot agree what to actually do to reform the banks.