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?
Actors are often paid more than 40 million dollars for movies that fail spectacularly. So, no.
They should be castrated then hung from their scrotum.
The whole system is flawed.
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.
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.
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
The bottom line is that there aren't many actual details aside from the sensationalized dollar figures, so it's really hard to make a judgement call. What if they were trading something unrelated to the blowout?
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.
This.
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.
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.
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)
And how is this going to be measured on a pro forma basis? Time machine? Crystal ball?
The problem that I see with clawbacks are if the guy leaves. It would be mad easy for people to leave banks after making a ton of money. It puts a stop number for talented traders. Because if you keep trading, you could lose money. And if I just got paid $100mm...but subject to clawbacks that could make it go to $10mm I'd gtfo and trade on my own. The argument that you would say is...well make it dependent on the group performance...but that isn't fair. So I don't see it happening if banks want to retain top talent vs. hedge funds.
Not saying clawbacks are wrong, I just don't see them as effective at retaining TOP talent. Maybe at lower levels you could do it and thereby induce a collective action to reduce risk. But you see the problem...right?
Don't clawback clauses remain effective a number of years regardless of whether you quit or not?
I would assume so. That's the problem IMHO. The guy who made the money left, and a bunch of other idiots are now playing with his livelihood. So isn't that a huge incentive to GTFO as soon as you make some money and do it on your own terms?
Except that many are idiots and make money by randomness and/or because of the bank's flow and they couldn't possibly make nearly as much money elsewhere and they certainly wouldn't want to expose their own PA to the kind of risks many are/were taking.
I guess you would stay for long enough to ensure you get past the clause and your equity vests, in which case you either dial down risk and stand getting cannes for underperormance, or keeping aiming for high P&L which puts you in the golden handcuffs situation.
What are you talking about? Have you ever read much about the ABS bubble? Some of those guys were literally retarded and had no clue what they were doing, but they were essentially hyperleveraged short vol in their trades and it worked out until it didn't (same idea as selling a bunch of put wingers on the S&P and praying nothing happens). The Big Short is a pretty quick and accessible read about it.
Based on your post, I assume you don't have a clue about what kind of trading most bank guys are doing. Comparing David Tepper--a fucking HF manager trading a large amount of his own capital and without client flow--to a bank guy running an ABS book at a bank is about as retarded as it gets.
Ahhh I love how my short hiatus from WSO made me forget what it was like talking to Jerome Marrow. Obviously flow trading is different from investing. I am aware. But the jist of what I am saying is that it is a drain on talent to implement clawback provisions. When you work with structured products other problems arise. Illiquidity for one. But also modeling, trend prediction, the definition of hedging, tail risk, etc.
Just like my hypothetical comparison of a flow trader or principal investor to David Tepper was one, The Big Short is a gross oversimplification of the actual crisis that occurred and there are far better reads if you are interested.
I've read plenty. You seem out of touch enough to need the simplest, most accessible read to get started. You really think somebody making a lot of money can't be luck? Seriously, most of those guys literally had no idea what they were doing. Literally thought housing prices cannot ever go down. They happened to make money for a period of time, believe themselves to be geniuses (of course never putting their own skin in the game), and then blew out horrifically, losing much more than they ever made.
If a retard made 50mil what does that make you? Hell what does that make all of us?? Only one of those guys is in FID, so only one of them might had run an ABS book. The rest are asset managers, prop traders and an equities trader, so....
It ends up being the same idea for many, if not most. Hyperleverage short vol. That can workout for very long periods of time. Decades even. The problem is that the losses often still outweigh the years of winning, but in the case of many of these traders, they got their payouts and never participated in the downside. Somehow convincing everyone, including yourself, that it is a viable and real skill doesn't in fact make it such. You can have lots of money and be a complete moron.
On top of that, I'm willing to bet most of those guys were trading client flow either directly or indirectly and it certainly could not be done without the bank's sales force, but traders will certainly attribute that P&L to their supposed abilities.
DUDE YOU NEED TO REALIZE JEROME IS SMARTERER THAN US.
The funny thing is that things like skewness are pretty simple concepts that anybody hoping to get into finance should understand. You can make terrible EV bets, but make money for a long time (maybe for your entire career) just because of the distribution of the returns.
That's the real problem here and you guys show it well. You guys moronically believe that somehow absolute amount of P&L somehow equals intelligence and trading savvy, which really couldn't be further from the truth and provided a large contribution to the crisis from the Wall St. side of things.
We're talking about being good at trading and risk management--in fact, you guys are attributing trading ability and profitability to these guys, so yes, it is moronic. Most of these guys really did believe they were some great traders and were just idiots. It's not like most of them knew they were straight up gambling/making losing/skewed bets.
And the fact that you assume that because somebody SHOULD default to participating in that activity is just baffling. What about the retarded hedge funds that just try to be asset collection businesses and then blow up their customers or produce shit returns? Sure, they personally made a lot of money, but it doesn't make what they do right ethically or morally. They just happened to get away with it and profit from it for a period of time.
And prop traders aren't trading the flow? Get the fuck out of here. Almost every single bank guy, even if they're not directly trading the flow, has a very good idea of what their clients are doing.
Jerome, you appear to have this higher level insight that no one, including traders at some of the most respected banks on the street, have. Why not stop wasting your time and go make your millions? You're really just bringing yourself down to talk to us common folk.
lol who said anything about insight level? I am not claiming to be great at anything. It isn't hard to assign a negative value though to guys who lost in the hundreds of millions or billions and literally had no idea what they were doing. Selling teenies / optionality / volatility and happening to make money for a period of time before blowing your entire lifetime P&L in a couple months doesn't make you particularly bright. The dysfunction of the system allows it to occur though.
Why don't we actually look at this logically:
-Traders at Lehman were responsible for its collapse. Period. -None of them meaningfully participated in the downside in the ways the shareholders did. -Many, if not most of them, did not even understand the instruments they were trading and did not produce any meaningful alpha. Leverage provided by the government is the only reason they were able to generate any form of returns (if you can even call it that).
Outside of Lehman we know that, -Absolute returns do not mean alpha or value added. There is volatility and skewness to the returns of all trading strategies and each has its own unique profile. -Much of the trading activity (ie flow trading) will generate significant positive P&L regardless of which trader is in the seat. It is the excess returns that would be alpha here. -Most of these fantastic blow-up traders have never put their own skin in the game, yet assign themselves and their trading ability a higher value than is likely valid (based on Sharpe, lifetime P&L, etc.).
Now you're telling me that because some dipshits gambled with shareholder money, much of which is likely on the edge of legality, and did okay for a few years that they are 'successful' and smart traders? Give me a break. Brian Hunter has a bigger bank account than virtually everyone on this site combined and he has done jackshit positive for anybody. The guys at Blue Gold, who just recently shut down shop, net lost investors money (outside of the small initial seed capital) after blowing up last year. Are they great traders because they got their 2/20 for a few years before blowing out?
At the end of the day, the system is broken and that's why the system collapsed to begin with. Idiocy like is seen in this thread--literally assigning intelligence to the fact some guy received some big bonuses--is a great reason to call for some form of reform in compensation, esp when investors' money is at stake and there is little transparency.
And if you want perspective from a trader, just read any of the Market Wizard books or read Fooled By Randomness or a million other books. There is a large % of the trading population that has a career negative P&L and/or is just part of the population that is a damn good coin flipper, but because of the fucked up structure of compensation, is rich at the loss of shareholders/investors/taxpayers/etc.
I'm going to have to take Jerome's side on this. Howie Hubler is probably the most egregious case of someone getting overpaid in the previous bubble but there are plenty of other cases of people having a negative P&L, and therefore not deserving any props. Can anyone really say they wish they were John Meriwether? Dude got his start at Salomon at exactly the right time and had the foresight to see fixed income was going to be big. But beyond that, he's an awful risk manager and clearly was incredibly lucky.
Wow... I was going to write a response to this, but instead I'm just going to quote Tracy Morgan here...
http://www.youtube.com/embed/7Dt5Nf7ct5c
Btw, the 50 mill guy runs a HF doing event-driven equities now. He probably had little to do with blowing up Lehman but I wouln't be surprised if a few spreads blew out on him in 07-08 (though it only mattered to Barclays once things got really ugly).
I'm not sure how you can disagree with Jerome's central points. He's right that the incentives for trading are highly skewed. The optimal strategy for the individual trader using other people's money is "Make yours and get the fuck out". That leads to strategies that blow up.
Jerome's right. Check out The Black Swan by Nassim, Freakonomics by Levitt, or many books that delve into statistical probabilities of this stuff. Net alpha wise, all these traders were way negative over time.
Lehman never got bailed out ... they never took taxpayers money ... therefore they had the right to pay their guys whatever the fuck they wanted.
Discuss.
Banks receive numerous benefits from the US government, give me a break. You think everybody is able to get the low/zero rates offered by the Fed for profit producing activities? Who else is able to take advantage of things like government guaranteed loans (FHA, SBA, etc.)?
And no, you can't pay their guys whatever the fuck they wanted. Many of their activities were shielded from shareholders and decisions made by management were often not in the interest of the shareholders, but in the interest of getting themselves paid, which is one of the biggest problems with the system.
Actually, I think that's wrong. If I recall correctly, the majority of Lehman's shareholders were employees (I want to say it was ~66% but I'm forgetting right now) and top management had a large stake in the firm. So, I do believe that management's decisions, in this case, were in the best interest of the shareholders since when the firm got paid, the majority of their shareholders were paid because the firm was owned by their employees.
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