Dear Lord Myners, went the letter from Sir Fred, former boss at RBS…”[you] indicated that you were aware of my entitlement and that no further ‘gestures’ would be required.” And with those words, yet another can of worms was revealed.

So, the government’s City Minister, Lord Myners, knew all along about Sir Fred Goodwin’s pension. And then it got worse, it turns out Sir Fred’s pension payment was discretionary. Discretionary – has such an innocent sounding word ever taken on such an ominous note?

It’s funny, but if you read the word ‘pension’ quickly, it can look a little like ‘prison’. So to take this headline from The Telegraph: “Treasury approved £700,000 pension, says Fred Goodwin”, just for a split second the author of this article read the word prison instead. Was that an imagined Freudian slip, do you think?

How long can it be before prison becomes the new word we start associating with bankers?

Sir Fred’s letter continued: “Like you, I believed that these gestures were appropriate in the circumstances, and sufficient, and revisiting the position today, I believe that they remain so. I accept responsibility for that which I was responsible for, and recognise that my actions must be consistent with this.

“I believe that they have been, and to voluntarily accept a reduction in pension entitlement which has been built up over many years and in other employments in addition to RBS, is not warranted.”

Ummm, so Fred built up his pension over many years, and during employment for other companies. Seen like that, it sounds reasonable, but will we ever get at the truth?

But here is one truth. When the media call for blood, there is no resisting that force. If Sir Fred does finally get his £650,000 a year pension it will be a big surprise, and it is surely now only a matter of time before criminal law is amended to apply to bankers’ greed.

Actually, though, there is a deeper truth. For years, bankers and their like have enjoyed enormous financial reward. Non-executive directors who approved the pay rewards themselves enjoyed enormous remuneration. They were a part of the system of excess. The shareholders, at least the institutional shareholders, who put the banks they owned under such pressure to grow year in year out, were also a part of the system of excess. For that matter, so were government advisers.

In the children’s story, no one pointed out the emperor wore no clothes. But in the story of bankers’ excess, it seems just about everyone involved wore no clothes, so, no one was going to point it out.

The truth is, for years we thought bankers were providing an enormous amount of value added to UK plc. It turns out we were wrong. According to figures worked out by the National Institute of Economic and Social Research (NIESR), over 2001 – 2007 the value added of the banking sector was £300bn. About £150bn of that has been lost. Wages per person in the financial sector are about double the average for the economy. Therefore, concluded NIESR, if people had been paid at the same kind of levels earned in other sectors, the banking sector could have earned its keep.

It’s a huge generalization, of course. Not everyone in financial services is overpaid – writers of newsletters, and those who do research into finance-related issues, are of course paid too little.

But it does seem that the City took on a bloated view of its own importance.

All those clever, indeed quite brilliant, mathematicians, with their algorithms, and command of algebra that goes way over the head of most of us, were, it turns out, not actually contributing to the economy.

Real wealth creators are those who innovate, who enable the production of a good or services for less effort. Surely the real wealth creators are entrepreneurs, and the reward system, not just in the UK, but probably across much of the world, had become skewed away from entrepreneurial activity, and instead towards those who didn’t really take risks at all.

But then again, there is another way of looking at all this. Evolution works though failure. Maybe we have learned that bankers were not as clever as we thought they were, maybe we have learned that the mathematicians were not as brilliant as the bankers thought they were. Or maybe, instead, they will learn from this, and develop better theories, better maths, and a better understanding of correlated risks.

If we come out of this with a financial sector that understands risk better, then that will be a good thing. The danger is that we will come out of this with a financial system that just doesn’t take risk at all.

The trouble is, business, and especially entrepreneurial business, needs backers who understand risk. Ask any entrepreneur, and they will tell you, in the long run, the biggest risk you can take is not to take risks at all.

© Investment & Business News 2013