Posted tagged ‘CSFB’

Another “Holy Shit!” Moment in Compensation: The P.A.F.

December 19, 2008

Wow. Seriously, wow

This year, up to 80% of the stock portion will come via what Credit Suisse is formally calling a “Partner Asset Facility,” of the illiquid assets, largely corporate loans.

Bankers won’t receive a return on the PAF program for eight years, although they can start to collect some of the principal in 2013. If the firm finds outside buyers for the assets, it will pay the proceeds to itself first, then provide the rest to employees.

The PAF applies only to senior bankers within the firm’s investment bank, which includes merger advisory, capital markets and leveraged finance. Those in Credit Suisse’s private bank and asset-management division aren’t subject to the PAF.

I’m going to play both sides of this one… But, how do you know it’s a good move? Hiede Moore’s post, in the next line, offers the proof:

The announcement elicited livid reactions from senior bankers, many of whom questioned whether it was legal. Many said they believed they were being unfairly punished for risky assets bought by colleagues in distant parts of the firm.

I’m not crying for these bankers, exactly, but they missed the point. To be honest, it’s a tremendous incentive for everyone to work together for the good of the firm. These same “livid” investment bankers, I’m sure, have been pushing transactions onto their counterparts in capital markets and trading for years. I know this, specifically of C.S.F.B. Their investment bankers would constantly use the “relationship” reason for doing a given transaction that resulted in real estate exposure for their firm (or leveraged finance commitments). So bankers, as a whole, shouldn’t say they are being unfairly punished for their colleagues decisions to make loans that they asked them to make. Now those bankers will not push loans they think might make it into their compensation! (There was a rumor that something like this happened a long time ago at Salomon Brothers.)

Now, why might this be a bad ideas? Honestly, all the reasons are highly technical. First, the investment is much longer dated than normal equity: first principal distributions come in 2013 and the investment will be zero-return for 8 years. This is a bit unfair, as the vesting and return of cash should be similar to normal equity plans if employees are given no notice. It’s only polite as it concerns things like paying college tuition. That being said, this is a program for senior employees and, thus, they should have planned for bad times and not gambled with their entire lifestyle. The two largest issues, though, are where the firm is using this to their advantage instead of being “just” about it. First, Credit Suisse pays itself before employees. That seems tacky.. pro-rata, maybe? Even pro-rata withe the firm counted more… Second, this makes C.S.F.B. employees much less mobile. When a bank is trying to figure out how to make the bankers being recruited from C.S.F.B. whole on what they lose when they depart their current firm (standard practice), it’s likely that their P.A.F. holdings will be valued at, or near, zero.

Now, despite the problems, I think this is a great lesson and a fair mechanism. And, unlike the clawback, if the firm loses money on the investment, so are the people getting paid in P.A.F. units… So you don’t have to worry about going after an employee, they get reduced along with shareholders.


Who Still Credits the Suisse with being Neutral? Anybody? Anybody at all?

February 12, 2008

A story that has been a focus for the debt markets, specifically as it relates to (corporate) credit debt markets, is the fire sales by C.S. of its stake in Harrah’s without coordinating with other banks. Indeed there is evidence that this wasn’t the first time C.S. got creative. The interesting thing about this turn of events is that these syndicates are put together to share risk and broaden distribution channels (some banks talk to accounts that others do not). Well, with the C.S. shenanigans creating a fire sale, leaving Harrah’s new bonds 7-10 points (cents on the dollar) lower and the loans being offered 5-6 points lower (estimates, market participants are rather cagey, but low 90s dollar price for the loans and 88 cents on the dollar for the bonds was widely noted in the marketplace) it seems like they made a good sale. Complicating the situation, of course, is the fact that they seemed to have caused the panic that led to the downdraft. Add to this technical overhang the lack of help from C.S. in distributing the remaining debt, and the fact that a sizable buyer was taken out of the market. It’s plain to see that C.S. worked against the syndicate and hurt the distribution power of the group.

Further, here’s an interesting datapoint: C.S. was reported to have around $30 billion in LBO debt on its books, around 10% of the estimate of $300 billion total LBO debt out there. Let’s assume all of this is too high by half (although why would journalists stress an extreme figure in a headline, hmm?). That leaves C.S. with around $15 billion. If, including Harrah’s, they sold $5 billion (rounding up all numbers in the previous Deal Journal post) but caused a 5 point decline in the market (assume it’s all loans they hold, no bonds, which suffered a more severe price movement), they lost $500 million. The figure includes $250 million that was saved on the loans they had already sold (overestimating their savings, since they only really “saved” that loss on Harrah’s, other sales occurred earlier). Ouch. But the remaining unsold LBO debt shed $7.5 billion in value (5 points on $150 billion) due to the sale, and ensuing panic. It seems that letting C.S. into the syndicate did anything but mitigate risk.

Because this situation has wreaked such havoc, perhaps other shops will actually take a stand and block C.S. from future syndicated deals. Their actions seem to show they can be relied upon neither to mitigate risk nor aid in distributing any.