A Welcome Bonus:
Bloomberg reports the investment bank Credit Suisse Group AG has set its end-of-year bonuses in a particularly innovative (and worthwhile) fashion. It is giving its employees some of the firm's illiquid mortgage-backed securities. This is "sheer genius," according to Megan McArdle: "If the things really are any good, they make money; if not, they take a bath along with the rest of us." Furthermore, this plan will reduce the volumne of such securities on the books at Credit Suisse. I'd like to see other banks and investment houses follow suit.
Boies' proposed settlement, which was very lucrative for the class, had a significant "coupon" component. Generally coupon settlements are regarded as a joke in class actions, but Boies was arguing that this case was different and that the coupons would have real value to class members.
In what I thought was a very effective demonstration that the coupons would have a real cash value in the hands of class members, Boies informed the court that his firm was proposing to accept its attorneys' fees in the form of the exact same coupons, in the same proportion in which class members would receive them. So if the coupons turned out to be worthless, so too would that portion of Boies' fee.
Very creative bit of lawyering, I thought. I have no idea if the coupons actually turned out to be worth anything, but someone might stop by Boies' office and see if he has any paintings from Sotheby's hanging on the wall.
Now we just have to watch out for back-dated awards made at a later date, should the value recover...
What's the tax ramifications? Since they currently have no value, presumably the recipients would not owe income tax on the bonus. I would presume, though, that they would owe capital gains tax on any subsequent appreciation in value.
It's like this: Suppose you have a warehouse with 1000 barrels of fine wine, worth $10,000 each.
Now further suppose, that some of those barrels have gone bad, and are worthless. But there is no way to test which barrels are good and which are bad. The only thing you know is an upper and lower limit on the percentage of bad barrels.
Buyers will only pay, based on the high limit of bad barrels. Sellers want to sell based on the low limit. That's the spread. If the uncertainty is 20% bad to 80% bad, sellers and buyers are too far apart.
At the same time, there are folks that *have* to sell, regardless of the spread. They have to take whatever is offered. So if you have cash and time, you can buy at distress sale prices and make a bloody fortune in 3 years. This is why several funds have erected gates so you can't withdraw now. They are not protecting themselves, they are protecting their investors as a whole per their proper fiduciary obligations.
I don't know how they are valuing these CDOs they are paying bonuses with, but I'd be delighted to get them in lieu of company stock for my bonus or pension/401K contributions.
The logjam will burst when there is some way to either 1) test the barrels to determine their status with some level of confidence, or 2) relatively accurately determine the percentage of bad barrels. Any partial progress on either of these two issues can narrow the spread, so that liquidity improves. If you get the spread to more like 25% bad (min) to 35% bad (max), a 10 point spread will find someone willing to take a 5% sell risk and pair them with a 5% buy risk. That is what the Fed is working on as of this week.
I'm very optimistic looking 12 months into the future. I'm just sorry the UAW didn't get a bigger kick in the nuts... they will always fight individual union members having a direct fiduciary interest in the company profits. That could lead to people working hard to improve profits! And I say this as the son and nephew of lifetime UAW members.
I hope the folks at Credit Suisse have similar luck.
I am not even that sure netflix was opposed to it since it showed how nice it was to have an upgraded membership for a month and may have enticed some old members into renewing the service.
Undoubtedly. But it's perfect for senior management and the trading desk guys. Hedge funds pay most of their compensation in the form of assets managed by the fund. This way, decision makers will (so the theory goes, anyway) be less likely to take stupid risks since their own fortunes are at stake. To the extent that investment banks are transforming themselves into hedge funds they should adopt this compensation strategy as well.
Oh, and also, investment banks have no business being publicly traded limited liability corporations at this point. You want to make highly leverages bets on illiquid assets? Put up your own money through a partnership to do so.
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