Toxic bonuses, Credit Suisse’s one hit wonder

August 7, 2009

Credit SuisseAt the height of the financial crisis, Credit Suisse came up with a clever idea to offload dodgy assets without having to sell them at knock-down prices. It stuffed $5 billion of them into a bonus pool for its bankers.

The Swiss bank’s scheme — which includes leveraged loans and commercial mortgage backed securities — exposed 2,000 senior Credit Suisse bankers to the value of those toxic assets. They were given 70-80 percent of their equity compensation in the form of so-called “partner asset facility” (PAF) units linked to the performance of the assets. The rest of the bonus was in the form of share units.

Under the PAF scheme, bankers receive semi-annual coupon payments (of LIBOR plus 250 basis points) on the initial award value. And they can look forward to annual cash payments — depending on the performance of the assets — after five years.

This was smart PR by Credit Suisse, which paid bonuses to its senior staff without attracting quite the odium that other banks did. That was because it was felt to have lumbered the bankers with some of the toxic dross they were collectively responsible for originating, rather than leaving it all in the laps of the shareholders.

Despite some griping at the time, it now looks as if the bankers haven’t done so badly either. Thanks to a partial recovery in credit markets, the PAFs are worth more than they were when the bank dropped them in the pool. The Wall Street Journal is reporting that the toxic assets have returned 17 percent since January.

Of course, had the bankers been paid fully in Credit Suisse equity, they would have done far better. Its shares are up around 83 percent over the same period.

CEO Brady Dougan and investment bank boss Paul Calello are probably relieved that the fund has so far come good given the dangers of bankers being lured elsewhere. But PAFs are likely to be a one hit wonder, after all banks won’t want to make a habit of having large, illiquid portfolios to find a home for.

(photo: Reuters)

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