I had to stop and think about this one for a few minutes. Eric Dash wrote this piece for Dealbook outlining how partners at Goldman Sachs (among other banks) have been hedging the non-cash portions of their bonuses since 2007. On the surface, it looks like an attempt to circumvent the "safeguards" put in place to keep top bankers focused on the long-term health of the bank and not just taking huge risks to juice a year-end bonus.
Basically what's going on is that top bankers whose bonuses include a hefty portion of illiquid stock are buying puts on their own bank's stock to offset the risk of their bonus stock dropping before they can sell it. Smart, right? But think about the implications for a moment. If you have a bunch of stock you can't sell for two or three years, but you've effectively hedged it with downside protection, do you really care if the company's stock drops?
Employees who hedge their holdings are less concerned about a falling share price. That’s why the government barred top executives at banks that received multiple bailouts from using the strategies until they paid back the funds.“Many of these hedging activities can create situations when the executives’ interests run counter to the company,’’ said Patrick McGurn, a governance adviser at RiskMetrics.
More broadly, critics say, the practice represents another end run around financial reform.
“Wall Street is saying it is reforming itself by granting stock to executives and exposing them to the long-term risk of that investment,’’ said Lynn E. Turner, a former chief accountant at the Securities and Exchange Commission. “Hedging the risk can substantially undo that reform.’’
So I ask you guys: Is hedging your bonus stock a good idea, or just another way to get around regulations?
It's a brilliant idea, but I thought it was illegal to short a company you worked for?
I think its fine. I really dont see people suddenly not caring about the performance of their firm if they are hedged. You are still working for a cash bonus, and I think if you have reached the managerial level at an IB they are naturally ahcievement seeking.
Buying puts isn't exactly shorting, per se. In fact, for anyone else it would be a bona fide hedge.
Whether or not it's explicitly prohibited, placing bets against your own firm is a good way to get yourself in trouble- especially if your bank has a strong team/loyalty to the firm culture.
The problem with deferred comp is that it only vests at the same time you can sell it. Most people who work for a company might be willing to own its stock for five years, but won't want to wait at the same firm five years for it to vest.
Btw, how did a pic of Ron Jeremy apply?
LOL. Somebody wanna take this one for me?
He's nicknamed the Hedgehog because he can suck his on cock, and hedge --> hedgehog. Lol
The Law of Unintended Results...the free market is always smarter than government. Watch out if government ever starts paying incentive bonuses to it's employees!
Obvious noob question, I'm sure, but wouldn't it be prohibitively expensive to buy 2-3 year puts?
One way of getting around the cost of those premiums is to sell calls. It effectively locks you in at a certain price. It's what Mark Cuban did when his company sold at the height of the dot com boom.
As for the buying of the puts - that's just smart.
Kinda expensive, but a put can never be worth more than its strike price, right? And you don't have to buy an exchange-traded put.
I would assume that most of these guys have enough unrestricted stock in their accounts that these puts aren't considered naked
^^^ Why would anyone own unrestricted stock in their own firm? You have enough exposure as it is as an employee, and if you're getting RSUs as bonuses, perhaps another 30% of your net worth is tied up in the firm. A diversified portfolio is tough enough with RSUs- I think a lot of smart financiers are going to be very careful when it comes to having unrestricted company stock in their PAs.
It's a good runaround to a stupid regulation. Anybody who thinks deferring compensation is going to prevent another financial crisis has another thing coming.
Wait, the rest of you guys can't suck your own cocks...
bahahhaha
bump
If I am not mistaken, I think that John Arnold wanted to buy some puts when Enron was teetering. He asked ones of his colleagues in an e-mail about the legality, costs, etc.
Enriching yourself at the firm's demise would be fucking awesome.
Wait a minute... If they're buying puts against their non-cash bonus (i.e. stock) aren't they just synthetically purchasing calls? Buying calls isn't betting against your company. You've just limited downside risk.
Dot com entrepreneurs did a lot of that, mostly through equity swaps to get around the shorting regulations. That caused a scandal, and now most avenues are explicitly prohibited either by law and/or employment contracts (like Illini's).
Adipisci ducimus sit nihil aut voluptatem eligendi. Vel cum voluptates velit quam aut mollitia architecto. Excepturi qui ut facere facilis. Aut cupiditate ipsa odio est. Rerum qui sit reprehenderit blanditiis rerum. Fugit ut eos eligendi earum.
Accusantium dolores est ut voluptatem. Officiis id inventore hic nesciunt iste aut. Aperiam omnis nisi quaerat culpa aspernatur nobis. Provident adipisci ipsum soluta qui.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Perspiciatis facilis consectetur id. Quisquam dolorum et eum hic. Aut et voluptates provident et explicabo. Quia accusantium officiis ipsam hic. Velit ipsum voluptate voluptatem similique tempora omnis aut. Et temporibus quis quia ipsum facilis ab sed. Sunt aperiam magni amet rem quo.
Velit et dolor quos praesentium voluptates. Accusamus sit aut consectetur accusamus aut ex deserunt. Iure dolorem maxime accusamus architecto impedit atque sit. Quas excepturi atque qui accusantium iure.