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The Latest Lehman Brouhaha
 

Edmundo Braverman's picture
ST
(Human, 14,330
 
Points)
 on 4/30/12 at 8:00am
dick-fuld-fail.jpg

Four years after their spectacular demise, Lehman Brothers is still causing problems for Wall Street. The latest bombshell hit on Friday when a compensation report required by the bankruptcy court disclosed that Lehman paid out almost $700 million in comp to 50 previously undisclosed traders in 2007. The same 50 were paid a total of $1.6 billion in comp in the three years prior to Lehman's bankruptcy.

Naturally, everyone is up in arms about the outsized payments to crew members of a ship that was clearly (at least in hindsight) foundering.

"It never ceases to amaze me," said Phil Angelides, chairman of the Financial Crisis Inquiry Commission. "You clearly have corporate leadership that's out of control, reckless without accountability and, in the course of driving the firm over the cliff, they're taking as much money as they can out of it."

The traders in question were paid anywhere from $8.2 million to $51.3 million in 2007, and 42 of the 50 made over $10 million that year. One of them even earned more than Dick Fuld himself. No one ever would have known about it if it weren't for the bankruptcy, because banks are only required to disclose the compensation of the top officers.

"They hide behind the guidelines that say the top five officers must disclose how much money they make," said William Cohan, who has written several books about Wall Street abuses. "You miss all these trader types and private-equity guys and derivatives salesmen who are making much more, and who you never know about."

Obviously this many guys earning over $10 million in a year offends the delicate sensibilities of many lawmakers. Whether the Lehman disclosure will be the catalyst for a new law requiring enhanced reporting on compensation I have no idea.

I think if the the folks who are most up in arms about this saw how these guys made their money, they might sing a different tune, though. Most traders can point to their P&L to justify their compensation. I suppose an argument could be made that their P&L was artificially inflated by bogus products, but the numbers don't lie in the end.

In any case, it'll be interesting to see if this story gets any legs this week, or if it just blends into the cacophony of Wall Street complaints in general.

You gotta admit, $10 million in a year is pretty baller. And how about the guy who made more than The Gorilla himself? I'll bet Fuld broke a half dozen pens before signing that comp sheet.

What say you WSO? Is any man worth $10 million a year? Would you have the same answer if you knew the company was about to go tits up?

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Comments

seedy underbelly's picture

Actors are often paid more

IB
(King Kong, 1,090
 
Points)
 on 4/30/12 at 7:38am

Actors are often paid more than 40 million dollars for movies that fail spectacularly. So, no.

Gate_Crasher's picture

They should be castrated then

IB
 
Points)
 on 4/30/12 at 7:54am

They should be castrated then hung from their scrotum.

The whole system is flawed.

MMBinNC's picture

I think it's stupid to say

CD
(Neanderthal, 2,156
 
Points)
 on 4/30/12 at 7:55am

I think it's stupid to say that someone who contributed positively to a failed company should not be paid. These men obviously made money for the firm, and allowed it to survive longer than it would have otherwise. If it comes to light that this was somehow incentive pay for future work performance(a la golden handcuffs) that they didn't live up to- that's a different story. Otherwise, fuck these lawmakers trying to score cheap political points.

Reality hits you hard, bro...

SonnyZH's picture

seedy underbelly: Actors are

HF
 
Points)
 on 4/30/12 at 7:55am
seedy underbelly:

Actors are often paid more than 40 million dollars for movies that fail spectacularly. So, no.

The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.

Maximus Decimus Meridius's picture

Like you said, if he got paid

ST
(Gorilla, 627
 
Points)
 on 4/30/12 at 8:00am

Like you said, if he got paid $50M he must have made a lot more money for the firm, so yeah, he was probably worth it. If everyone had done the same thing Lehman would still be around, it's that simple.

BTW, anyone know what the acronyms for the units are? FID and EQ are clear, but PI and IMD?

MMBinNC's picture

Maximus Decimus

CD
(Neanderthal, 2,156
 
Points)
 on 4/30/12 at 8:17am
Maximus Decimus Meridius:

Like you said, if he got paid $50M he must have made a lot more money for the firm, so yeah, he was probably worth it. If everyone had done the same thing Lehman would still be around, it's that simple.

BTW, anyone know what the acronyms for the units are? FID and EQ are clear, but PI and IMD?

I'd guess Principal Investing and Investment Management Division.

Reality hits you hard, bro...

Kenny_Powers_CFA's picture

Maximus Decimus

HF
(Neanderthal, 2,193
 
Points)
 on 4/30/12 at 8:20am
Maximus Decimus Meridius:

BTW, anyone know what the acronyms for the units are? FID and EQ are clear, but PI and IMD?

PI=principal investing
IMD=investment management division

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

Unforseen's picture

Its this sense of profit

(King Kong, 1,099
 
Points)
 on 4/30/12 at 8:52am

Its this sense of profit sharing that attracts many people to the industry. Even some of the biggest money making industries (Oil) don't pay their employees like this

Check out my Blog

HedgeHog's picture

The structure, not the dollar

HF
(Baboon, 126
 
Points)
 on 4/30/12 at 9:08am

The structure, not the dollar amount, is the problem. They were (and often, still are) incentivized to take huge risks. When most of these guys blew up in 2008, they didn't give back a penny (or at least the 80% of their bonus they got in cash) while shareholders ate the entire loss.

manbearpig's picture

The guy who was running the

CO
(Neanderthal, 3,029
 
Points)
 on 4/30/12 at 9:15am

The guy who was running the SSG at Goldman in the early 2000s was making upwards of 50MM consistently, and the year he quit he made 70MM and thought he deserved 200M since his group added 2B to Goldman's bottom line that year. There have been traders at Citi who have broken the 100M/year barrier. I think one of the guy's was Morgan Sze in Hong Kong. With that in mind, the amounts don't seem absurd in and of themselves. The fact that Lehman went down the next year and there weren't any clawbacks is the problem. Some of my clients have now started to implement a partial clawback on the cash portion if losses in subsequent years breach a certain threshold. I think it's a reasonable move.

-MBP

Oreos's picture

HedgeHog: The structure, not

HF
(Neanderthal, 2,449
 
Points)
 on 4/30/12 at 9:16am
HedgeHog:

The structure, not the dollar amount, is the problem. They were (and often, still are) incentivized to take huge risks. When most of these guys blew up in 2008, they didn't give back a penny (or at least the 80% of their bonus they got in cash) while shareholders ate the entire loss.

Enter the Credit Suisse approach.

TheKing's picture

HedgeHog: The structure, not

O
 
Points)
 on 4/30/12 at 9:23am
HedgeHog:

The structure, not the dollar amount, is the problem. They were (and often, still are) incentivized to take huge risks. When most of these guys blew up in 2008, they didn't give back a penny (or at least the 80% of their bonus they got in cash) while shareholders ate the entire loss.

This.

Check out my WSO Blog

GoodBread's picture

Like others said, the

AM
(Neanderthal, 3,602
 
Points)
 on 4/30/12 at 10:01am

Like others said, the structure is the problem. The worst of which was probably guaranteed deals for traders. A common thread among top prop guys who then failed as HF managers is that they couldn't handle not having the "bank put" behind them. Guaranteeing compensation in the millions makes that problem all the worse.

Financial Modeling Training
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derivstrading's picture

A couple of issues some of

ST
(King Kong, 1,350
 
Points)
 on 4/30/12 at 10:18am

A couple of issues some of you are missing

1) Pay has to reflect the cost of the trading seat. As in what profit would a normal trader make in that seat. If you are trading a product that has just exploded what proportion of money you make is actually your value added. This is hard/impossible to judge and why sometimes traders are overpaid/underpaid.

2) How safe is your pnl? Case in point the mortgage desks, made tons of money and then exploded. Problem is that if the a trader is paid 10% of PNL and the PNL for years 1 - 4 is +100m, +100m, +100m, -2bn the trader has still gotten 30 mln (assuming all cash, this number iwll be lower if its stock/clawbakc etc)

S&T Careers - The only trading interview guide you will ever need

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Oreos's picture

derivstrading: 2) How safe is

HF
(Neanderthal, 2,449
 
Points)
 on 4/30/12 at 10:30am
derivstrading:

2) How safe is your pnl? Case in point the mortgage desks, made tons of money and then exploded. Problem is that if the a trader is paid 10% of PNL and the PNL for years 1 - 4 is +100m, +100m, +100m, -2bn the trader has still gotten 30 mln (assuming all cash, this number iwll be lower if its stock/clawbakc etc)

And how is this going to be measured on a pro forma basis? Time machine? Crystal ball?

UFOinsider's picture

Unforseen: Its this sense of

O
(Human, 10,302
 
Points)
 on 4/30/12 at 11:58am

YOU JUST GOT TROLLED
http://www.troll.me/images/red-foreman322/dont-you...

MMBinNC's picture

The problem that I see with

CD
(Neanderthal, 2,156
 
Points)
 on 4/30/12 at 12:20pm

Reality hits you hard, bro...

MMBinNC's picture

Not saying clawbacks are

CD
(Neanderthal, 2,156
 
Points)
 on 4/30/12 at 12:23pm

Reality hits you hard, bro...

GoodBread's picture

Don't clawback clauses remain

AM
(Neanderthal, 3,602
 
Points)
 on 4/30/12 at 12:24pm

Financial Modeling Training
Guide to Finance Interviews

MMBinNC's picture

GoodBread: Don't clawback

CD
(Neanderthal, 2,156
 
Points)
 on 4/30/12 at 12:30pm

Reality hits you hard, bro...

Jerome Marrow's picture

MMBinNC: GoodBread: Don't

O
(Gorilla, 737
 
Points)
 on 4/30/12 at 12:47pm
GoodBread's picture

I guess you would stay for

AM
(Neanderthal, 3,602
 
Points)
 on 4/30/12 at 12:54pm

Financial Modeling Training
Guide to Finance Interviews

MMBinNC's picture

Jerome

CD
(Neanderthal, 2,156
 
Points)
 on 4/30/12 at 12:55pm

Reality hits you hard, bro...

Jerome Marrow's picture

What are you talking about?

O
(Gorilla, 737
 
Points)
 on 4/30/12 at 1:05pm
UFOinsider's picture

Jerome Marrow: What are you

O
(Human, 10,302
 
Points)
 on 4/30/12 at 1:06pm

YOU JUST GOT TROLLED
http://www.troll.me/images/red-foreman322/dont-you...

MMBinNC's picture

Jerome Marrow: What are you

CD
(Neanderthal, 2,156
 
Points)
 on 4/30/12 at 1:13pm

Reality hits you hard, bro...

MMBinNC's picture

UFOinsider: Jerome

CD
(Neanderthal, 2,156
 
Points)
 on 4/30/12 at 1:14pm

Reality hits you hard, bro...

Jerome Marrow's picture

The funny thing is that

O
(Gorilla, 737
 
Points)
 on 4/30/12 at 1:16pm
Jerome Marrow's picture

MMBinNC: Jerome

O
(Gorilla, 737
 
Points)
 on 4/30/12 at 1:19pm
Maximus Decimus Meridius's picture

Jerome Marrow: What are you

ST
(Gorilla, 627
 
Points)
 on 4/30/12 at 1:20pm
Jerome Marrow's picture

Maximus Decimus

O
(Gorilla, 737
 
Points)
 on 4/30/12 at 1:23pm
MMBinNC's picture

Maximus Decimus

CD
(Neanderthal, 2,156
 
Points)
 on 4/30/12 at 1:26pm

Reality hits you hard, bro...

Jerome Marrow's picture

That's the real problem here

O
(Gorilla, 737
 
Points)
 on 4/30/12 at 1:31pm
Maximus Decimus Meridius's picture

Jerome Marrow: Maximus

ST
(Gorilla, 627
 
Points)
 on 4/30/12 at 1:50pm
Jerome Marrow's picture

We're talking about being

O
(Gorilla, 737
 
Points)
 on 4/30/12 at 2:38pm
Jerome Marrow's picture

And prop traders aren't

O
(Gorilla, 737
 
Points)
 on 4/30/12 at 2:39pm
happypantsmcgee's picture

Jerome, you appear to have

O
(Almost Human, 9,621
 
Points)
 on 4/30/12 at 3:02pm

If I had asked people what they wanted, they would have said faster horses - Henry Ford

Jerome Marrow's picture

happypantsmcgee: Jerome, you

O
(Gorilla, 737
 
Points)
 on 4/30/12 at 5:58pm
Jerome Marrow's picture

And if you want perspective

O
(Gorilla, 737
 
Points)
 on 4/30/12 at 5:56pm
GoodBread's picture

I'm going to have to take

AM
(Neanderthal, 3,602
 
Points)
 on 4/30/12 at 6:56pm

Financial Modeling Training
Guide to Finance Interviews

Frieds's picture

Wow... I was going to write a

AM
(Neanderthal, 2,530
 
Points)
 on 4/30/12 at 6:55pm
GoodBread's picture

Btw, the 50 mill guy runs a

AM
(Neanderthal, 3,602
 
Points)
 on 4/30/12 at 7:01pm

Financial Modeling Training
Guide to Finance Interviews

PetEng's picture

I'm not sure how you can

O
(Gorilla, 746
 
Points)
 on 4/30/12 at 7:35pm
Jerome Marrow's picture

happypantsmcgee: Jerome, you

O
(Gorilla, 737
 
Points)
 on 5/1/12 at 3:21pm
BankingWaffle's picture

Jerome's right. Check out The

IB
 
Points)
 on 5/1/12 at 5:51pm

Cheers.

NewGuy's picture

Lehman never got bailed out

HF
 
Points)
 on 5/1/12 at 7:04pm
Jerome Marrow's picture

NewGuy: Lehman never got

O
(Gorilla, 737
 
Points)
 on 5/1/12 at 7:30pm
Frieds's picture

Jerome Marrow: [And no, you

AM
(Neanderthal, 2,530
 
Points)
 on 5/1/12 at 10:27pm
GoodBread's picture

NewGuy: Lehman never got

AM
(Neanderthal, 3,602
 
Points)
 on 5/2/12 at 7:02am

Financial Modeling Training
Guide to Finance Interviews

UFOinsider's picture

Being bailed out is

O
(Human, 10,302
 
Points)
 on 5/2/12 at 11:06am

YOU JUST GOT TROLLED
http://www.troll.me/images/red-foreman322/dont-you...

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