While I don’t wish anyone ill, I do like it when people get what they deserve. Contradictory? In some cases, yes. Then again, in some others, no. And in this case, I think bankers are getting what they deserve.
By Douglas Rediker, published on December 23rd
You know the financial crisis is bad when investment bankers are grumpy at Christmastime. That’s because in investment banking, Christmastime is bonus time, and bonus time is what it’s all about.
Bonus time is when all the deals you crafted and all the money you made for the bank gets toted up and you get your fair share.
Usually, in the world of Wall Street and its international counterparts, that “fair share” can reach 10 or 15 times your annual salary. That usually makes year-end a time of great joy in investment banking land.
But this year is different. This is the year when dodgy mortgages, which had been packaged together, securitized and thus magically transformed into “ultrasafe” securities, blew up. That led to the collapse of so many of the deals bankers had crafted (and got paid for) in past years. Many banks disappeared or were merged out of existence.
Thousands of jobs were lost, and retirement nest eggs, made up largely of stock received at previous bonus times, dramatically declined in value — many to the point of worthlessness.
This year is different because many CEOs have agreed to forgo bonuses entirely, and other investment bankers who still have jobs will awaken to find that coal in a Christmas stocking looks good by comparison.
That’s because one of the world’s largest financial institutions, Credit Suisse, just announced that it would pay its bankers up to 80 percent of their 2008 year-end bonuses in the form of what The Wall Street Journal called “an illiquid group of junk bonds, mortgage-backed securities and corporate loans” instead of cash or stock, as had been the norm throughout the industry.
CS effectively told its bankers that this year, instead of getting paid money, they would get paid in kind — the same kind of over-leveraged, securitized paper that caused much of the crisis in the first place.
This is a fabulous idea. Not only does it help the bank’s balance sheet by moving these toxic assets off their books and onto those of its employees, but it serves as an unambiguous reminder to those whose job it is to create and sell financial products in the markets that this isn’t a game of smoke and mirrors.
Securities actually have to have value, and those who create and sell them can’t just walk away after the wreckage and claim that it’s somebody else’s problem. It imposes the discipline that if you are selling a deal to your clients, you should be willing to invest in it yourself. Those who created, traded and sold securities defined by words like “junk” or “toxic” now own them. A lot of them.
Perhaps it will make those who structure products and deals think a little differently in the future. It’s one thing if you think that your job is just to sell something. It’s another if you know you will have to live with the consequences yourself.
Read the rest of the article here.