March 17, 2008
Bankers finally lose a lot of money from risk-taking
There has been much fuss lately about distorted incentives in bankers’ pay that encourage them to take excessive risks because they do not suffer the full consequences of failure. I have written about it myself.
The Bear Stearns collapse shows the other side of that argument. Financial News estimates that Bear employees, who own about a third of the equity through stock bonuses and pension savings, have just lost a collective $5.2bn based on the sale price to JP Morgan compared with the share price of Bear in December.
Even divided among 14,000 employees, that is plenty of money. Because of the way in which bonuses are paid on Wall Street these days, with the bulk issued in shares that only vest after three to five years, they had little choice but to be heavily invested in the fortunes (and now misfortunes) of their bank.
Nor are they unusual. MarketWatch reports that Lehman Brothers employees own about a third of the investment bank’s shares while Merrill Lynch employees hold 26 per cent of Merrill. Many other Wall Street bankers, in fact, are extremely dependent on company stock for their wealth.
MarketWatch draws the comparison with Enron, where many company employees had lots of Enron shares in their 401(k) pension accounts. After that debacle, there were moves to stop companies forcing their staff to invest heavily in their own shares through their pensions.
But it seems to me only right that Wall Street employees are paid bonuses in their employers’ stock and ultimately risk the kind of loss that Bear Stearns’ staff have just suffered. I am sorry for at least some of them as individuals but it is surely right that bankers should have a strong incentive to ensure their institutions are well-managed.
The Bear Stearns losses might even persuade my colleague Martin Wolf that there is no need for regulators to impose limits on bankers’ pay. The market appears to be working with brutal efficiency.
While it is undoubtedly true that lots of employees lost lots of money at BSC, they’ve also received big, fat bonuses that were awarded based upon short term success.
Posted by: Nick N. | March 17th, 2008 at 7:59 pm | Report this comment[…] Business Blog von John Gapper, Bankers finally lose a lot of money from risk-taking […]
Posted by: “Die Banker zahlen endlich für das Risiko” • Börsennotizbuch | March 17th, 2008 at 10:39 pm | Report this commentBear Stearns shows that relationship banking still does matter. I believe I am right in saying that Bear Sterns was the only major Wall Street house not to support the LTCM rescue. So dog eats dog and no-one minded too much about helping BS as they got into difficulties. Another old fashioned banking lesson the wonderkids forgot.
Posted by: David Potter | March 17th, 2008 at 11:37 pm | Report this commentThis proposition did not seem to apply to Stan O Neal or Chuck Prince, they did not come out of it too badly..
Posted by: Marie-Athena ,lawyer | March 18th, 2008 at 12:31 am | Report this commentSame for the head of CDOs at Barclays Capital ,in London, who almost costed Bob Diamong his own job..
Wow! Karma anyone? JPM ends up with the Bear. One hundred or so years ago the great man himself engineered an end to the panic of 1907. Ten or so years ago Bear told the NY Fed and the big dogs of wall street to pound sand when LTCM was in a ditch and a contagion was a real concern. This weekend the big dogs turned on the Bear denying it room to breath and the repo money to survive.Jim Rogers, China’s first Hells Angel said today that Bear execs got $1 billion in bonus money in Jan ‘08. Their reward for a job poorly done was a bit more than the $deuce dropped on them by JPM. It is hard to miss and easy to appreciate the symbolic snub that two bucks a share represents. Next time someone asks me to lend a teetering hedge fund run by a couple of Nobel laureates a hand I will know the right answer.Its karma baby.
Posted by: gym-bob | March 18th, 2008 at 1:44 am | Report this commentYou make some good points, but one problem I have is that we, as taxpayers, basically gave JP Morgan a windfall. They can cherry-pick Bear’s best assets, and have a Fed-backed loan supporting the risky parts. How does that prevent moral hazard? All it does is give JP Morgan the license to do what Bear wanted to.
Posted by: KPO'M | March 18th, 2008 at 3:22 am | Report this commentIt’s all very well agreeing that employees should also be exposed to downside risk of their employers, but some of the schadenfreude here is misplaced. Not all Bear employees were involved in the risky business - so they MAY have some upside in the form of bonuses, they definitely have downside and they have little control over the organisation as a whole. If you are about to lose your job AND your pension plan has just tanked you may well end up feeling aggrieved.
Posted by: Ian | March 18th, 2008 at 4:38 am | Report this commentWhat is the difference between a drug mafia working together and sharing the booty during ‘good’ times and losing a ‘deal’ during bad times? Does it justify a mafia? It is difficult to accept this as a market process. Worse. It may be an argument for shielding other groups which are still hiding their CDOs and waiting for the Fed to bail them out without any counter obligation. The reasoning developed in the blog offends my sense of equity and fair play. Martin Wolf can still plead for a limiton bankers’ compensation.
Posted by: K. Subramanian | March 18th, 2008 at 5:07 am | Report this commentWhy couldn’t Bear (and other Wall Street) employees have hedged the shares or options they’d been awarded but were not yet able to vest, e.g. with put options?
Posted by: Tim | March 18th, 2008 at 8:11 am | Report this commentO.K. so maybe the Karmic resolution to the Bear issue was a bit messy. I feel for the innocents harmed by the deal and certainly agree that JPM has reaped a windfall.Few on wall street are pristine, none walk on water and a couple may deserve the ridiculous bonus money thrown their way.JPM is not without sin. But when you join the team you know who you are playing for and no one forces you to stay. When the victor becomes the vanquished it stings a bit.If one gives no quarter one should ask none. I have competed against the guys who get bailouts when they blow up and have done so without an equivalent safety net. Forgive my shandenfreude Ian. It was just a giddy moment of karmic relief.I will refrain from joyous outbursts for the remainder of the day.
Posted by: gym-bob | March 18th, 2008 at 7:49 pm | Report this commentOk, if you say, it is a “Karmic ” resolution why do the innocents have to suffer? I would think market dymanics are in play here , the relief may come from adjustment or correction.. but Karma? ? I just think of Karma in other terms than Banking failures or market forces.
Posted by: Marie-Athena ,lawyer | March 18th, 2008 at 11:10 pm | Report this commentOne billion in bonuses? I guess the recent turn stopped them in their tracks laughing all the way to the Bank..!I am not an economist, but it sounds more like the bubble blew..
Marie-Athena,lawyer, I am a cynic. My writing was facetious. And if there is such a thing as Karma than I am certain to suffer for my fit of schandenfreude.
Posted by: gym-bob | March 19th, 2008 at 2:44 am | Report this comment