How Wall Street Execs Won Big From The Crisis

This piece in DealBook written by Steven Davidoff exposes how WS execs profited (even more) from the financial crisis. During this period, execs and management were prevented from receiving bonuses due to TARP restrictions. This encouraged a lot more options to be given out, which has become somewhat serendipitous. Just how fortunate were these execs? Take for example Amex's CEO, who received 1.9 million stock options with a strike price at $16 when their stock fell below $10, which has now returned to their pre-recession level of $58.56 (11/05/12). That's a whopping $80M. Funny how things work out.

Taken together, this is a sobering view of executive compensation. It shows how compensation can have little to do with performance and more with stock market movements and the luck of having options granted instead of less valuable stock. More tellingly, it also shows how the government most likely enriched financial executives by pushing banks to award more equity compensation through TARP than they otherwise would have.

This situation is perhaps more luck than anything. When your stock is trading below $10 from $40 during an industry crisis with no end in sight, who would've thought it would quadruple in value within a few years. It's possible that management abilities have something to do with their (short-term) rise in stock price, and should be compensated accordingly. How much is up for debate. This article, however, doesn't seem to articulate this view. High executive compensation usually isn't an issue, but it's the added effect of government bailout money, coupled with the encouragement of stock options by government regulators that would make most people feel uneasy, especially taxpayers.

There's some things to be learned here. If I were an investor or a regulator, some changes would need to be made so that shareholders or taxpayers wouldn't be footing the bill in a bailout situation; restricted stock instead of options would be preferable as an equity reward. Compensation based on company's fundamentals (which requires more skill rather than luck) would make more sense. Perhaps CEO's shouldn't be the Chairman of the Board either. And if I were the CEO, I'll remember to compensate myself with a gluttonous amount of stock options when my company tanks.

What do you think? Is it fair? If not, is it the government to blame. Did the stars align in their favor, or is there something inherently wrong with how they were compensated? Refer to the article to see the rest of the compensation rewards for all other WS firms.

 

I think that it is fair in this case. The main idea was to incentivize CEOs and other executives to take the necessary steps to rebuild their businesses. Restricted stock is still guaranteed money. If he was given $1mm in stock at $16 and it cratered to $10, the guy still makes $620k. With options it is $0. So it incentivizes them without expressly giving them money in a time of crisis (which is not good for publicity). The guy aided in saving the company and made a lot of money because of it. If he failed he'd have nothing.

Reality hits you hard, bro...
 

The government/public presumably wanted companies to recover from the crisis and restore economic growth. Stock options incentivized management to achieve this goal, those who succeeded were rewarded generously, and those who failed weren't. Maybe the payouts ended up excessively generous but seems like the basic system worked.

 

Yea, I mean at the time, no one knew if their firm was next in line to go Tango Uniform (tits up) after Bear, Lehman, and nearly AIG. It's a push IMO, and really something for the shareholders to decide. not other people.

 

You're idiots. They only recovered because of fucking enormous government intervention.

Consider the enormous amount of liquidity that the Federal Reserve has pumped directly into the banks, via purchases of outstanding and risky debt, giving them access to free money through various programs, etc., money which has not been passed through to borrowers, but instead used to a large extent to make bets in the market. Further, the risk in these stocks has been minimised by the bailouts and backstopping accorded by the Fed. Govt.

So stock prices have risen not because the banks have engaged in the real business of banking, but because of the assistance and backstopping by the taxpayer, via the Fed's monetary easing/backstopping policies.

Think, robots, think.

 
Best Response

Hilarious! You guys are whining about a paltry $80MM, when they've taken you for a ride to the tune of hundreds of billions if not more...

tl;dr If it is a bailout company, then no, it is not fair.

Full version.

"Capitalism" should already have a tool to sort out this issue. It's called bankruptcy. It usually results in management losing their jobs/financial stake in the company when the company can't stand on its own anymore (the case for all of the bailed-out banks/institutions). Sometimes management even gets sued. However, it was not used in the case of the financial bailouts because these institutions are too systemically important and the government had to intervene. So what's the alternative?

The only issue should have been how to restructure these companies in an orderly fashion as Chapter 11 would have been too disorderly for the financial system (e.g. Lehmans).

What the US system should have done: (or some form of this)

  1. The government should haven put these banks into some form of conservatorship, restructured and broken them up as appropriate (equity + some junior claims get wiped out; split Investment Banking from Commercial Banking/Deposit taking/Sort out the AIG /derivatives issue linking the banks)
  2. Fired/prosecuted their senior executives/complicit regulators & bureaucrats
  3. IPO'd the recapitalised/newly split up banks under new management in a new regulatory environment after stablising the financial system...

... i.e. the kind of thing you expect to happen in an orderly bankruptcy in a capitalist system.

Incidentally, this is the kind of thing a lot of economists and even some hedge fund guys like Bill Ackman had suggested. It wouldn't have cost the hundreds of billion of dollars in bailout money, nor the multiples of that in guarantees. It needn't use public funds at all for the recapitalisations. You just convert part of the bank debt that you don't wipe out into equity.

If you contrast this capitalist approach with what actually happened under the Bush/Obama bailouts, you have to question whether or not the US banking system and banking industry is "capitalist", or fair at all (not that they are the same thing).

/thread

 

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