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December 18th, 2008

Could This Idea Catch On?



Who says there’s no creativity left in the credit markets? Credit Suisse has found a way to offload some illiquid assets and still award some year-end bonuses — by combining the two:

The bank will use leveraged loans and commercial mortgage-backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. The new policy applies only to managing directors and directors, the two most senior ranks at the Zurich-based company, according to a memo sent to employees today.  …

The securities will be placed into a so-called Partner Asset Facility, and affected employees at the bank, Switzerland’s second biggest, will be given stakes in the facility as part of their pay. Bonuses will take the first hit should the securities decline further in value.

“It’s monstrously clever,” said Dirk Hoffman-Becking, an analyst at Sanford C. Bernstein Ltd. in London who has a “market perform” rating on Credit Suisse stock. “From a shareholders’ perspective it’s great because you’ve got rid of some of the assets and regulators will be pleased because you’ve organized a risk transfer.”

For employees, “there’s some upside in there and if the alternative is nothing, it’s a lot better than nothing,” Hoffman-Becking said.

Talk about poetic justice. Of course, there’s also a chance that these guys will make a profit — but only when and if the securities market recovers. Talk about an incentive to try to help that along.

Exit question: How long before this idea catches on elsewhere? Could we pay our Congressional representatives with, say, Freddie Mac paper?

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One Response to “Could This Idea Catch On?”

  1. Tim Manni Says: December 19th, 2008 at 10:18 am

    Despite how unnecessary I feel these extreme actions are needed merely to provide directors with “year-end bonuses, could this be the incentives companies need to restructure their books to benefit the company, and the marketplace as a whole? What is the chance here they will encounter risk for some real damage?

    Why do company execs fight so hard for these end-of-the-year bonuses? I Guess if last year’s bought your summer home, you’d be pretty upset if 2008 ended without the opportunity to shop for a new boat.

    Paul, let’s just hope lawmakers don’t catch wind of your prediction…

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