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.
