Rewarding Investment Bankers with Mortgage Backed Securities & Junk Bonds: Justice? - 19 Dec 2008

http://dearjohnthain.wordpress.com/2008/12/19/another-holy-shit-moment-in-compensation-the-paf/

Wow. Seriously, wow…

This year, up to 80% of the stock portion will come via
what Credit Suisse is formally calling a “Partner Asset Facility,” of
the illiquid assets, largely corporate loans.

Bankers won’t receive a return on the PAF program for eight years,
although they can start to collect some of the principal in 2013. If
the firm finds outside buyers for the assets, it will pay the proceeds
to itself first, then provide the rest to employees.

The PAF applies only to senior bankers within the firm’s investment
bank, which includes merger advisory, capital markets and leveraged
finance. Those in Credit Suisse’s private bank and asset-management
division aren’t subject to the PAF.

I’m going to play both sides of this one… But, how do you know it’s
a good move? Hiede Moore’s post, in the next line, offers the proof:

The announcement elicited livid reactions from senior
bankers, many of whom questioned whether it was legal. Many said they
believed they were being unfairly punished for risky assets bought by
colleagues in distant parts of the firm.

I’m not crying for these bankers, exactly, but they missed the
point. To be honest, it’s a tremendous incentive for everyone to work
together for the good of the firm. These same “livid” investment
bankers, I’m sure, have been pushing transactions onto their
counterparts in capital markets and trading for years. I know this,
specifically of C.S.F.B. Their investment bankers would constantly use
the “relationship” reason for doing a given transaction that resulted
in real estate exposure for their firm (or leveraged finance
commitments). So bankers, as a whole, shouldn’t say they are being
unfairly punished for their colleagues decisions to make loans that
they asked them to make. Now those bankers will not push loans they
think might make it into their compensation! (There was a rumor that
something like this happened a long time ago at Salomon Brothers.)

Now, why might this be a bad ideas? Honestly, all the reasons are
highly technical. First, the investment is much longer dated than
normal equity: first principal distributions come in 2013 and the
investment will be zero-return for 8 years. This is a bit unfair, as
the vesting and return of cash should be similar to normal equity plans
if employees
are given no notice. It’s only polite as it concerns things like paying
college tuition. That being said, this is a program for senior
employees and, thus, they should have planned for bad times and not
gambled with their entire lifestyle. The two largest issues, though,
are where the firm is using this to their advantage instead of being
“just” about it. First, Credit Suisse pays itself before employees.
That seems tacky.. pro-rata, maybe? Even pro-rata withe the firm
counted more… Second, this makes C.S.F.B. employees much less mobile.
When a bank is trying to figure out how to make the bankers being
recruited from C.S.F.B. whole on what they lose when they depart their
current firm (standard practice), it’s likely that their P.A.F.
holdings will be valued at, or near, zero.

Now, despite the problems, I think this is a great lesson and a fair mechanism. And, unlike the clawback,
if the firm loses money on the investment, so are the people getting
paid in P.A.F. units… So you don’t have to worry about going after an
employee, they get reduced along with shareholders.