19 December 2008

Pay them with their own trash

What a great idea, pay 100% of bonuses and 60% of salaries by distributing the banks illliquid assets. That fixes the moral equation, anyway.

"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.

The Zurich-based bank plans to pool commercial mortgage-backed securities and leveraged loans it can't sell because demand has seized up, then dole out units in the entity to managing directors and directors as part of this year's pay, according to a memo made available by a spokesman.

"Employees receiving partner-asset facility units will participate in the potential gains from these assets over time if they are liquidated at prices above current market values and also bear risk of loss depending on the liquidation proceeds," the memo said.

The memo said that, with the introduction of PAF units, "a material block of legacy-risk positions will be removed from Credit Suisse's risk-weighted assets and this will also lead to a reduction in capital usage. This new compensation structure, therefore, helps to advance our strategy of reducing risk."

Employees will hold an equity stake of roughly 13% in the fund, which is composed of 60% of buyout loans and 40% CMBS, a person familiar with the situation.

The plan, the first of its kind among major Wall Street houses, puts focus squarely back to Credit Suisse's investment bankers, for whom the new system could potentially become lucrative. However, some employees were said to be enraged at the idea, saying they could potentially incur losses if tax is levied on the book value of the assets."



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