The Reckoning On Wall Street, Bonuses, Not Profits, Were Real

[Steely Dan]

Link

 

For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million.

 

The difference between the two amounts was his bonus, a rich reward for the robust earnings made by the traders he oversaw in Merrill’s mortgage business.

 

Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million

 

________________________________________________

 

“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.”

 

Even Wall Streeters concede they were dazzled by the money. To earn bigger bonuses, many traders ignored or played down the risks they took until their bonuses were paid. Their bosses often turned a blind eye because it was in their interest as well.

 

“That’s a call that senior management or risk management should question, but of course their pay was tied to it too,” said Brian Lin, a former mortgage trader at Merrill Lynch.

 

___________________________________________

 

Mr. O’Neal himself was paid $46 million, according to Equilar, an executive compensation research firm and data provider in California. Mr. Kim received $35 million. About 57 percent of their pay was in stock, which would lose much of its value over the next two years, but even the cash portions of their bonus were generous: $18.5 million for Mr. O’Neal, and $14.5 million for Mr. Kim, according to Equilar.

 

_________________________________________

 

Mr. Lin, the former Merrill trader, arrived late to the party. He was one of the last people hired onto Merrill’s mortgage desk, in the summer of 2007. Even then, Merrill guaranteed Mr. Lin a bonus if he joined the firm. Mr. Lin would not disclose his bonus, but such payouts were often in the seven figures.

 

Mr. Lin said he quickly noticed that traders across Wall Street were reluctant to admit what now seems so obvious: Their mortgage investments were worth far less than they had thought.

 

“It’s always human nature,” said Mr. Lin, who lost his job at Merrill last summer and now works at RRMS Advisors, a consulting firm that advises investors in troubled mortgage investments. “You want to pull for the market to do well because you’re vested.”

 

_____________________________________________

 

“What happened to their investments was of no interest to them, because they would already be paid,” said Paul Hodgson, senior research associate at the Corporate Library, a shareholder activist group. Some Wall Street executives argue that paying a larger portion of bonuses in the form of stock, rather than in cash, might keep employees from making short-sighted decision. But Mr. Hodgson contended that would not go far enough, in part because the cash rewards alone were so high. Mr. Kim, for example, was paid a total of $116.6 million in cash and stock from 2001 to 2007. Of that, $55 million was in cash, according to Equilar.

 

________________________________________

 

As the damage at Merrill became clear in 2007, Mr. Kim, his deputies and finally Mr. O’Neal left the firm. Mr. Kim opened a hedge fund, but it quickly closed. Mr. Semerci and Mr. Lattanzio landed at a hedge fund in London.

 

All three departed without collecting bonuses in 2007. Mr. O’Neal, however, got even richer by leaving Merrill Lynch. He was awarded an exit package worth $161 million.

[molson_golden2002]

Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.

 

But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.

 

Now, if you ask me, this looks like a "failed business model." But let's bash the UAW, its more fun to pick on the workers instead of the Free Marketeers

[pBills]

But come on Molson... that's the financial market. It's ok for them to have a failed business model.

[molson_golden2002]

But come on Molson... that's the financial market. It's ok for them to have a failed business model.

Silly me

[Steely Dan]

The whole thing is just flabbergasting. Personally I think this whole industry needs to monitored closely. My favorite part is how they kept trying to get bonus' by ignoring problems and making paper profits.

[Alaska Darin]

Now, if you ask me, this looks like a "failed business model." But let's bash the UAW, its more fun to pick on the workers instead of the Free Marketeers

Why isn't it fun to pick on both of them, since both of them are pretty much totally in the wrong? Oh, because you're a partisan moron who is incapable of such "difficult" processes.

[bills_fan]

Now, if you ask me, this looks like a "failed business model." But let's bash the UAW, its more fun to pick on the workers instead of the Free Marketeers

 

 

Why do you suppose the business model is failed?

[meazza]

Why do you suppose the business model is failed?

 

Because their bonuses were too big duh!

 

[pBills]

Such fiscal irresponsibility. Keeping leaders in place in those companies is part of a bad business model.

[GG]

Why do you suppose the business model is failed?

 

It was a bit askew, but don't look fir the intelligentsia here to give you an answer.

 

Of course, speaking of the pendulum swinging all the way to the other side, the Swiss have a solution:

ZURICH -- Credit Suisse Group said Thursday it will use up to $5 billion of its own illiquid assets such as mortgage securities to pay senior staff year-end bonuses at its investment bank, a move meant to spread risk more evenly between the bank and its employees.

[bills_fan]

It was a bit askew, but don't look fir the intelligentsia here to give you an answer.

 

Of course, speaking of the pendulum swinging all the way to the other side, the Swiss have a solution:

 

 

I agree and have my own theory. I was just wondering why others believed it to be a broken business model.

 

That is pretty interesting with respect to CS. Depending on the security, I might be all over that.

[GG]

I agree and have my own theory. I was just wondering why others believed it to be a broken business model.

 

I knew you were making a funny.

 

That is pretty interesting with respect to CS. Depending on the security, I might be all over that.

 

In all honesty, it's a very novel way to clean up the balance sheet at virtually zero cost. But there is a potential issue for the employees who may have to pay taxes on the receipt of the illiquid assets. I'm guessing that CSFB's message to the employees is - the cash portion of the bonus is to pay the tax, and now go out and restore profitability so you can earn back the liquidity out of these securities.

[bills_fan]

I knew you were making a funny.

 

 

 

In all honesty, it's a very novel way to clean up the balance sheet at virtually zero cost. But there is a potential issue for the employees who may have to pay taxes on the receipt of the illiquid assets. I'm guessing that CSFB's message to the employees is - the cash portion of the bonus is to pay the tax, and now go out and restore profitability so you can earn back the liquidity out of these securities.

 

 

There may be a way around that...CS could set up an employee plan under various Federal Rules (specifically 701 or 4(2)) with the plan sponsor being a trust created to hold these illiquid securities. Employees would receive (for free) options to purchase the trust securities at a fixed price. The illiquid securities would pay income into the trust, the income would be the asset owned by shareholders in the trust. The only taxable event for employees would be upon exercise of the options. The shares of the trust would rise as the income rises. The employees could then exercise their options (and pay taxes on the exercise amount) while receiving the income distribution of the trust (taxed as capital gains) f the trust is estabilshed as a pass through entity...like a REIT. I think that works from a legal/tax perspective. Not a bad idea.

[GG]

There may be a way around that...CS could set up an employee plan under various Federal Rules (specifically 701 or 4(2)) with the plan sponsor being a trust created to hold these illiquid securities. Employees would receive (for free) options to purchase the trust securities at a fixed price. The illiquid securities would pay income into the trust, the income would be the asset owned by shareholders in the trust. The only taxable event for employees would be upon exercise of the options. The shares of the trust would rise as the income rises. The employees could then exercise their options (and pay taxes on the exercise amount) while receiving the income distribution of the trust (taxed as capital gains) f the trust is estabilshed as a pass through entity...like a REIT. I think that works from a legal/tax perspective. Not a bad idea.

 

Not bad at all, and since the holdings ill be corporate high yield bonds and CMBS, should deliver a nice return over the long term. Where do I sign up?

[DC Tom]

There may be a way around that...CS could set up an employee plan under various Federal Rules (specifically 701 or 4(2)) with the plan sponsor being a trust created to hold these illiquid securities. Employees would receive (for free) options to purchase the trust securities at a fixed price. The illiquid securities would pay income into the trust, the income would be the asset owned by shareholders in the trust. The only taxable event for employees would be upon exercise of the options. The shares of the trust would rise as the income rises. The employees could then exercise their options (and pay taxes on the exercise amount) while receiving the income distribution of the trust (taxed as capital gains) f the trust is estabilshed as a pass through entity...like a REIT. I think that works from a legal/tax perspective. Not a bad idea.

 

Nice...

[GG]

Why do you suppose the business model is failed?

 

Another great article.

 

This one probably comes closest to the root of the problem.

[bills_fan]

Another great article.

 

This one probably comes closest to the root of the problem.

 

 

Agreed, at least on Wall Street.

 

Good article, thanks for linking.

[Alaska Darin]

Link

 

For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million.

 

The difference between the two amounts was his bonus, a rich reward for the robust earnings made by the traders he oversaw in Merrill’s mortgage business.

 

Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million

 

________________________________________________

 

“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.”

 

Even Wall Streeters concede they were dazzled by the money. To earn bigger bonuses, many traders ignored or played down the risks they took until their bonuses were paid. Their bosses often turned a blind eye because it was in their interest as well.

 

“That’s a call that senior management or risk management should question, but of course their pay was tied to it too,” said Brian Lin, a former mortgage trader at Merrill Lynch.

 

___________________________________________

 

Mr. O’Neal himself was paid $46 million, according to Equilar, an executive compensation research firm and data provider in California. Mr. Kim received $35 million. About 57 percent of their pay was in stock, which would lose much of its value over the next two years, but even the cash portions of their bonus were generous: $18.5 million for Mr. O’Neal, and $14.5 million for Mr. Kim, according to Equilar.

 

_________________________________________

 

Mr. Lin, the former Merrill trader, arrived late to the party. He was one of the last people hired onto Merrill’s mortgage desk, in the summer of 2007. Even then, Merrill guaranteed Mr. Lin a bonus if he joined the firm. Mr. Lin would not disclose his bonus, but such payouts were often in the seven figures.

 

Mr. Lin said he quickly noticed that traders across Wall Street were reluctant to admit what now seems so obvious: Their mortgage investments were worth far less than they had thought.

 

“It’s always human nature,” said Mr. Lin, who lost his job at Merrill last summer and now works at RRMS Advisors, a consulting firm that advises investors in troubled mortgage investments. “You want to pull for the market to do well because you’re vested.”

 

_____________________________________________

 

“What happened to their investments was of no interest to them, because they would already be paid,” said Paul Hodgson, senior research associate at the Corporate Library, a shareholder activist group. Some Wall Street executives argue that paying a larger portion of bonuses in the form of stock, rather than in cash, might keep employees from making short-sighted decision. But Mr. Hodgson contended that would not go far enough, in part because the cash rewards alone were so high. Mr. Kim, for example, was paid a total of $116.6 million in cash and stock from 2001 to 2007. Of that, $55 million was in cash, according to Equilar.

 

________________________________________

 

As the damage at Merrill became clear in 2007, Mr. Kim, his deputies and finally Mr. O’Neal left the firm. Mr. Kim opened a hedge fund, but it quickly closed. Mr. Semerci and Mr. Lattanzio landed at a hedge fund in London.

 

All three departed without collecting bonuses in 2007. Mr. O’Neal, however, got even richer by leaving Merrill Lynch. He was awarded an exit package worth $161 million.

Now apply the same eye to the "Clinton Economy".

[RLflutie7]

Why isn't it fun to pick on both of them, since both of them are pretty much totally in the wrong? Oh, because you're a partisan moron who is incapable of such "difficult" processes.

 

 

That's just it, both are not totally in the wrong. UAW employees have a contract. They go to work every day and do their job and collect a pay check. They have done nothing wrong.

 

Comparing the two, you would have to say that the union employees were sabotaging the product. And that has been done in the past.

 

Back in the 70s it was always said that union employees would overlook quality problems to get product out the door on time. And management should not have let them get away with it. But they turned a "blind eye". That however, came to an end, because it put the car companies at risk because of poor quality.

 

And in a sense, Merrill Lynch should have never set up a compensation package were the employees are making money when the firm goes under. Turning a "blind eye" is wrong.

[Alaska Darin]

That's just it, both are not totally in the wrong. UAW employees have a contract. They go to work every day and do their job and collect a pay check. They have done nothing wrong.