Posted tagged ‘MS’

Contrarian View: HR 1586 (T.A.R.P. Surtax Bill) will Create Millionaires

March 19, 2009

This is  just a  few quick thoughts, but I believe, in a few years, we’ll be able to take this bill and place it’s effects high on the list of unintended consequences. Let’s wonder what a reasonable firm would do in order to protect it’s people as much as possible from this legislation… I would put forth the proposal that a firm would give it’s employees the most “bang for the buck.” This seems to clearly be by paying in options. Now, I don’t know all the technical details behind how finance companies have to account for and value options given as compensation, but, using the CBOE option pricer and volatility from Morningstar, I get around $0.50 as the option price for a strike of $2.50 at the time Citi was giving bonuses out, around the time it was at $1.00. Or, if we use $2.50 for the equity price and the strike price, we get $1.62 option price.

Since those prices are per share for lots of 100 option, we get anywhere between 500,000 and 155,000 options, depending on when Citi’s rules would require it to re-cast it’s payments to employees. That’s obviously a huge range. However, for some context, when Citi was trading at $50 / share, having 500,000 shares would have meant you had $25 million in the bank. And 155,000 shares would have meant you had $7.75 million in the bank. However, let’s look at some more likely scenarios. Citi is currently trading at $3.00. As these options are longer dated (I believe the prices quoted above were for 3 year options), could one see a world where Citi is at $10, $15, or even $20 3 years in the future? I think so. So, 155,000 options would be worth between $1.55 million and $3.1 million.The other option is some combination of cash and restricted stock. As we see above, the total shares one would get, if merely receiving restricted stock (at the current trading level) is approximately half to two-thirds.

Now, obviously there are risks. Citi might not be around in three or more years–that is anyone’s guess! This assumes share price increases quite a bit (although the numbers look good even for more modest scenarios). However, all of these would be issues with restricted shares as well–which Wall St. heavily relies upon for compensation. Also, this is just for Citi, which is clearly in a more precarious position than some of it’s peers. For a firm like Goldman, Morgan Stanley, or even Merrill/BofA, the probability of defaulting is way lower. And, for those firms, volatility is lower, making options less valuable, and increasing the ratio of options to restricted shares. the purposes of comparison, Goldman is currently trading at approximately $100 and it’s two year volatility is around 60%. This yields an option price of around $39, or 3x as many options as restricted shares. So, for every $20 Goldman’s shares go up, one would make 3x as much if they had options.

You see where I’m going with this? Now, I don’t know the specific rules surrounding a firm’s ability to re-cast their payments once they’ve been made, or how they compute strike prices, restricted share award prices, or other details. But, I would bet that these firms go back to their employees and let them re-think some of their options (no pun intended).

Fun Super Irony Fact: HR 1586, in the 110th congress was the “The Death Tax Repeal Act of 2007”!!!

Advertisements

Semblance of Rationality in Compensation Structure, Finally

December 9, 2008

It’s finally occurred. As I just read on Clusterstock, there is officially some sort rationality creeping into Wall St. payment structures. Claw-backs are here, as I suggested previously (I was hardly alone). Now, I wonder what the real impetus behind this sort of decision really is. Is it public officials railing against bonuses? Traders who were paid millions to put on the positions that are now sinking their (former) employers? Or, perhaps it’s the fact the C.E.O.’s and executives who are used to taking no risk whatsoever, as Felix also intuits, and are used to being compensated in the ponzi scheme that has the slogan, “in line with our peers.” This sort of groupthink, parading as transparency (that only pertains to rising compensation, obviously) has been championed by familiar names. But, other familiar names have been railing against exactly this sort of thing (yes, all of those links are to distinct posts on the Icahn Report …). I wonder if some of those executives are angry at having to give up theirs and not being able to inflict the same on their minions… Not totally unjustifiable, after all it wasn’t John Mack who persoanlly took the positions that have caused writedowns at his firm, just like it wasn’t Vikram at Citi. Still, when the kings get stung you know the subjects will feel it.

This relates to some other topics on anti-competitive behavior, but I’ll leave those for the time being.

The Return: An Interesting Sign of Confidence

June 24, 2008

In the beginning, there was Charles Schwab returning to the epononymous firm. Then there was the return of John Mack to Morgan Stanley. Then, there was Jeff Kornthal’s return to Merrill. And now, there is Mike Gelband returning to Lehman Brothers. High level executives coming back into the fray seems to be both a huge vote of confidence and a harbinger of the worst being behind or nearly over.

This, to me, sends a huge signal. If you left, when things were good, and then an unmeasurable storm sets in, why would you return? One would need to be very confident that things were over. A returning executive would need to have a high degree of comfort that the problems internally were well understood and able to be fixed. If these sorts of tests weren’t met then why would one re-marry their fate to a firm they specifically took a financial risk divorcing? One thing never lies, I’ve noticed–the people indicators. Now, Mr. Gelband might be wrong, or things might get worse, but still…

Disclosure: I recently bought some shares of LEH … and I’m feeling pretty good about that move right about now.