UPDATE: I told you so.
‘‘I can see a situation, subject to funding constraints, of senior bankers moving en masse as a team or possibly setting up a boutique themselves,’’ Nick Hellen, a partner at Executive Access, an executive search firm based in Hong Kong, told Reuters.
The financial crisis wiped out many hedge funds around the world, and the industry is expected to shrink this year to 2005 levels, but those making money have plenty of pulling power.
Most hedge funds function on a 2-and-20 model, meaning employees earn 2 percent of assets they manage, regardless of the firm’s success or failure. They also get to keep 20 percent of profits if the fund is making money and is above a minimum level of investment returns known as the high-water mark.
For example, Artradis’s two main funds have combined assets under management of about $3.5 billion and returned 27 percent and 35 percent, respectively, last year, according to the company. That means a potential return of more than $200 million for the two funds in a firm of fewer than a dozen fund managers.
So while President Obama wants to set up a $500,000 cap on top executive pay at companies receiving taxpayer money, executives working for successful hedge funds can still earn several million dollars a year.
Obama has announced that the income of executives from bailed-out companies will be cut as much as 90%.
Responding to the furor over executive pay at companies bailed out with taxpayer money, the Obama administration will order the firms that received the most aid to slash compensation to their highest-paid employees, an official involved in the decision said on Wednesday.
The plan, for the 25 top earners at seven companies that received exceptional help, will on average cut total compensation this year by about 50 percent. The companies are Citigroup, Bank of America, American International Group, General Motors, Chrysler and the financing arms of the two automakers.
Some executives, like the top traders at A.I.G., will face tight limits on their pay. In addition, the top-paid employees at all the affected companies will face new limits on their perks.
The plan will also change the form of the pay to align the personal interests of the executives with the longer-term financial health of the companies. For instance, the cash portion of the executives’ salaries will be slashed on average by 90 percent, and the rest will be replaced by stock that cannot be sold for years.
I expect that this action will lead to an exodus of talented executives from these companies.
it would have no direct impact on firms that did not receive government bailouts or that have already repaid loans they received from Washington. Therefore, it is unclear how much effect, if any, the plan will have on the broader issues relating to executive compensation, income inequality and the populist animosity toward Wall Street and corporate America.
One thing it may do is to teach businessmen that getting in bed with government leaves a hangover. The threat of such an action goes back to last year and led to an early exit for many young traders who left for greener pastures. This part is hilarious:
the White House, which has come under attack from conservatives for giving the government what they consider too large and intrusive a role in the economy, has also made clear that it has no intention of seeking to impose any broad-based caps on executive pay.
Oh, OK. So they aren’t going to micromanage these firms, eh ?
The White House has proposed, for instance, giving shareholders a nonbinding vote on the pay of top executives.
It has also proposed that compensation committees of boards, as well as compensation consultants, be more independent.
And it will propose that the companies under review divide the function of chairman and chief executive between two executives. Many of these proposals have been introduced in legislation by Senator Charles E. Schumer, Democrat of New York.
Well, that certainly clears it up. Well, what could go wrong ? How about an exodus of the best talent?
Boutique investment firms and top hedge funds are slowly lapping up the cream of global banking talent as the financial crisis forces banks to cut staff and limit the pay of their top risk-takers, Reuters says.
From Singapore to New York, leading traders and sales chiefs are making the switch as government pressure piles on Wall Street and European banks to cut multimillion-dollar bonuses.
‘‘The firms that still have a lot of assets under management, the hedge funds that have not been hit by redemptions, they are still picking up some of the money-makers from the big banks,’’ Pernille Storm at Hudson, an executive search firm in Singapore, told Reuters.
Singapore’s largest hedge fund, Artradis, said this month that it had hired a high-profile risk trader from Royal Bank of Scotland Group and a Credit Suisse executive based in New York, while Fox-Pitt, Kelton, an investment advisory firm, recently picked up five people from banks including Merrill Lynch and HSBC to focus on Asia.
In London, UBS lost two senior European investment bankers last month to the boutique Close Brothers, another to Lazard and at least three energy bankers to Lexicon Partners.
In the United States, where the credit crisis led to the failure of Lehman Brothers, the fire sale of Bear Stearns and the takeover of Merrill Lynch, the trend is even more visible.
Earlier this month, Moelis, an investment banking boutique, said it had hired Chris Ryan, former global head of credit fixed-income at UBS, as a managing director in New York, its second high-profile hire in a month.
UBS, the world’s biggest wealth manager, has cut thousands of jobs globally but ‘‘continues to hire selectively,’’ a spokesman in Hong Kong told Reuters.
Boutiques have also been expanding their clout globally, highlighted this week in Asia when Evercore Partners, an American mergers-and-acquisitions boutique, announced a strategic partnership with Citic Securities of China.
‘‘It’s possible for boutiques to actually hire top talent, which was almost impossible for them while the market was going ballistic from 2005 to the middle of last year,’’ Thomas Hester, head of equity at Fox-Pitt, Kelton, told Reuters.
Yes, Obama sure knows how to be a capitalist, doesn’t he ? Well, maybe that isn’t his talent. I’ll grant you that top GM executives may have a problem finding new jobs but that is another problem altogether. That was years in the making and the unions killed those companies. The financial services industry will just kill off New York City and Schumer will never understand what he helped do.
What has happened to the belief in a free-market capitalist system. These companies are like a sinking ship and the government is telling the executive to bail water with a sieve. Why is that when politicians get to Washington they think they can part the seas and restore the fortunes of the nation, when this entirely dependent upon the efforts of hard-working entrepreneurial capitalists in private enterprise.
Well, Mike… my thoughts:
First – I’m opposed in principle to corporate income taxes to begin with. It’s smoke and mirrors! As part of the cost of doing business, “business taxes” are added to prices paid by consumers. The fact that in a legal sense corporations were long ago given “personhood” status by the Supreme Court tells you all you need to know about our legal system.
(*SMIRK*)
Second – I was, am, and always will be against “bailouts.” There’s no such thing as “too big to fail.” Because those idiots in Washington – both Democrats AND Republicans chose to buy into such nonsense it’s the nation itself which is in danger of “failing.”
Third – Back to business taxes… if you didn’t have the corporate income tax then you wouldn’t have tax loopholes such as writing off personnel expenses! Unfortunately, we don’t live in “Bill’s World,” rather, we’re stuck in the Age of Obama. So here’s the deal acknowledging that what is, is: No compensation above twice the median individual American income should be eligible for write-off. For example, up to $80K… the company can write off the compensation paid; every cent above $80K is ineligible for write-off. (And I use the word “compensation” deliberately. I’m talking ALL wages and in fact in my perfect world we’d include the value of “benefits” in the compensation equation for purposes of tax policy.
Fourth – Stock options “given” (or sold at discounted cost) to employees should be done away with – made illegal. Listen… options have value. The value comes out of something “real” ultimately. Rather than get all caught up in complicated profits/loss equations and instead of always wondering if the movers and shakers (those with the most options at the least cost) are operating in narrow personal self-interest (stockwise) or in the best fiduciary tradition, I say just take options off the table completely and return compensation to PAY.
Anyway, Mike… that’s the Big Picture as defined by yours truly.
As to what Obama is doing… (*SHRUG*)
Sorry. I don’t have a problem with it as long as it’s only companies that asked for and accepted bailouts. Those which had bailouts foisted on them… that’s different – there I’d say no.
BILL
I don’t disagree except that it is highly counterproductive. The financial services companies were responding to incentives that were, in large part, coming from government. Without Fannie Mae and Freddie Mac those securitized mortgages would not have existed. The rating services, like Moody, are at least as much at fault. European banks had the same behavior in buying and selling the instruments that turned out to be worthless. Now, the young traders have moved on and the chances of those companies surviving and repaying the TARP money are reduced. As Metternich said of another screwup, “It was worse than a crime, it was a blunder.”
“The financial services companies were responding to incentives that were, in large part, coming from government. Without Fannie Mae and Freddie Mac those securitized mortgages would not have existed. The rating services, like Moody, are at least as much at fault.”
AGREED. But what’s that have to do with the question of executive pay…???
I don’t buy this whole line about “talent” being tied to huge bonuses. Beyond a certain level of compensation – beyond say two or three hundred grand a year – I just don’t see employers as getting more bang for the buck out of any employees.
Oh… sure… there’s the bidding FOR talent AMONG those looking to hire it, but for the average financial/corporate executive position we’re not talking an apples to apples comparison to say sports stars even when the intermural competition is factored in.
There are far more individuals capable of excelling in business and finance than there are individuals able to play third base or shortstop for the Yankees.
(*WINK*) (Yeah… even with last night’s disaster I’m still taking pride in the Yankees!)
Understand me, Mike… I’m separating entrepreneurs – a Bill Gates, a Steve Jobs, a Henry Ford, a Thomas Alva Edison – from mere “suits.”
Those who are entrepreneurs should be able to write their own tickets – at least until they take their company public.
As for employees… well take even a Jack Walsh. How much is enough? How much is too much? You may respond “let the market decide,” and to that I say fine… except the market (meaning capitalism itself) has been distorted by the tax code and the stock market and the whole “paper gains” over REAL PROFITS modern American business culture.
Hey… I’m following your lead with what you wrote above concerning how GOVERNMENT actions have distorted capitalism.
When “productivity” is more closely aligned with the Vegas aspects of the stock market vs. “real” success in terms of expansion of business profits (sales! unit profit margins!) and then we further distort the process by tying compensation to STOCK appreciation… well… that’s the problem.
Again, Mike, as always, I’m trying to fight my way through the smoke and mirrors to get to the bottom line.
As I see it (and I’m NOT a conspiracy nut), at the very top of the American economic/political pyramid you have to a large extent a rigged game. Two words: Goldman-Sachs.
(*SHRUG*)
This revolving door at the highest levels of our economic and political infrastructure seems to me to be a means of downright theft and corruption. And I’m not talking chump change… I’m talking hundreds of billions in TARP and bailouts and all the rest of it.
Anyway…
(*SIGH*)
BILL
Gah. This administration seems to lack the ability to grasp consequences of their decisions, unintended and otherwise. They make a major decision, indulge the need for immediate gratification while patting themselves on the back and telling each other, job well done. How can they be so blind to the big picture….
I have no sympathy for the overseers or the overseen in this case. They are both despicably self-serving…one for politics, one for rigging the game. I have no doubt these pay cuts will get hyped to kingdom come, but the money will still flow to those who play ball on either side. New players, same old game. The rumors are already flying around the market mavens as to how the insiders are drafting the new work arounds. Look, the simple truth is that Wall Street and DC both know they are money trees for each other. The blood they suck will be the typical investor both foreign and domestic, and the US taxpayer. But the real money is in the bond markets. Stock markets are small potatoes to those folks.
The consensus among the cream of the traders I follow is that this bear rally, while expected, is unlike any they’ve every seen. Chart patterns and traditional technical market signals have been useless, fundamentals are ignored, normal pullbacks have been truncated, all in all there are reasons to wonder about what’s supporting this stock market. It’s well known that as much as half the bailout money that has been placed in the banking system has gone to restore their cash reserves.
However, not so well known is that rather than push the other half of bailout funds into the economy through increased loans to industries, these funds are being used by the trading desks of the major banks to trade in global markets in order to provide further profits. Both from trading their own accounts, as well as, fees received as brokering trades by those who are established as market makers. Goldman Sachs is the major player here. JP Morgan is the most exposed to derivatives, and still counts them at full value for their reserves. Do not ever use the term free markets when discussing Wall Street. The only free part is their freedom to stack the odds to favor the house. With full complicity from the Fed, Treasury, and SEC. I have personally done well by following their tracks as best I can. But it’s usually far into their moves, and late to see the party is over. Not a complaint, just a heads up from someone with skin in the game.
Sorry, got a little off topic there. But the past couple of weeks this has really started to annoy me as a trader and investor. The taxpayer aspect mostly.
There was a pretty good discussion on Fox this morning about this. Bill Crystal brought up the Glass Steagall Act, which has been watered down over the years. That may be a useful debate but I don’t see the Democrats doing it. I suspect the next Congress will get into that with either a GOP majority or a very small D majority. Right now, all the Democrats want to do is cram through leftist priorities before they lose their majority.
I like you contention that the financial professionals whose short term focus on their own excessive bonuses are “competent.” Yeah, you would want any of the genius’s at AIG or Bank of America to have to leave, just because, without my money, they wouldn’t have a job now at all. We saved them through basically charity and now they have the stones to complain about the strings we attach to OUR money! Wow. And, they can willing sycophants everywhere to follow them and say “hey, it’s capitalism when the government keeps them in business, but it ain’t capitalism when the govt, their largest stockholder, tells us how much we can pay.” That’s a fundamental misunderstanding of fairness, economics, politics, and corporate governance.
Tim, to you and your fellow leftists all employees, no matter what the job or where they work, are interchangeable. Jerry Brown, when he was governor of California, once said that janitors should be paid more than doctors because doctors enjoyed their work and janitors didn’t. Does it occur to you that some people may be of value because they understand financial markets better than others do ?
I expect your reply will be that they didn’t understand well enough or the system wouldn’t have gone tits up. Fair enough. But there are people who are great traders who might be too reckless to be in charge but whose skills will be hard to replace. Read my post on what happened to Harvard’s endowment for more on this topic.