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Toxic bonuses, Credit Suisse’s one hit wonder

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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.

Credit Suisse pulls ahead of UBS

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UBS has always looked down its nose at its cross-town rival, but Credit Suisse under Brady Dougan has turned the tables on the blue-bloods. As UBS remains mired in a potentially catastrophic legal tussle with America’s tax collectors, CS is winning market share across the board.

With its second quarter results, Dougan has shown that the storming first quarter was no flash-in-the pan. Stripping out various one-offs (including a counter-intuitive 1.1 billion Swiss franc loss thanks to an improvement in the value of its own debt), Credit Suisse’s net income increased 62 percent on the first quarter, to 2.5 billion Swiss francs. That is equivalent to a boom-like 27 percent-plus return on equity.

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