I wish I thought of this…

Posted by Marc Hodak on December 18, 2008 under Executive compensation | Be the First to Comment

Credit Suisse is going to use its toxic debt to pay executive bonuses. This is brilliant on a couple of levels.

First, it has a “let the chef eat his own cooking” appeal. True, very few of the managing directors eligible for this program were directly involved in creating these putrid instruments, but to the extent that this is a harbinger of a policy that threatens to use the most mis-priced assets as a basis for bonuses in the future, there will develop at least some peer pressure not to create such things again. Frankly, a lot of the problem in investment banks has been the willingness of one group of managers to laugh away boneheaded behavior on the part of their peers, instead of saying, “Hey, are you sure that lead structure will float?” Uncaring behavior happens where bonuses were based largely on the short-term profits of one’s own division.

The other clever thing about this plan is that it transfers these assets into something called a “Partner Asset Facility” at the current value. From here, any mark-to-market changes in these assets will be exactly offset by changes in their liability to the managers. In other words, this vehicle effectively removes from their balance sheet the very assets that were gumming it up.

The bank won’t begin making payments from this facility for five years, and who knows what those payments will look like, so the retention value of this plan is a bit dubious, like awarding you managers gobs of underwater options. But for those who believe that these illiquid assets are way undervalued, this could be exciting to the risk-takers in the firm who could possibly end up laughing all the way to and from the bank.

Credit Suisse will also be instituting a claw back mechanism. We did think of that one.