Yes, Virginia, There is A Christmas Bonus. Junk!

Well, if you work at Credit Suisse and you’ve been good this year, there is heartening news.  There are going to be bonuses! The bad news?  The bonuses the bank is giving out are a stake in its junky investments. Credit Suisse lost $5 billion this year and is left holding a big bag full of loans in commercial mortgages — the radioactive investments behind much of the financial crisis.  Top brass at the company will be given a stake.  "While the solution we have come up with may not be ideal for everyone, we believe it strikes the appropriate balance among the interests of our employees, shareholders and regulators and helps position us well for 2009," Chief Executive Officer Brady Dougan and Paul Calello, CEO of the investment bank wrote in a memo. ABC’s Charlie Herman reports: It’s true.  Credit Suisse, Switzerland’s second-largest bank, announced that it will use some of those toxic assets, the very ones that brought Wall Street to its knees, to pay year-end bonuses for some of the banks most senior employees. The idea behind this is an attempt to address the rising anger at the Wall Street wizards who took enormous risks, in return for billions in bonuses, by selling what turned into toxic debt to investors.  The collapse in this market of mortgages bundled together as investments plunged Wall Street into chaos and led to a billion taxpayer rescue of the financial sector.  Yet the bonuses keep coming, even if considerably smaller, to the outrage of many (you know who you are). Credit Suisse, which has not received taxpayer dollars, has decided to take $5 billion worth assets that no one wants (referred to as illiquid because it can’t sell them to anyone because there is no market for them) that have lost value (now worth about $.65 to the original $1 value) and will essentially hand them over to several thousand executive level employees (managing directors and directors) as part of their bonus compensation for 2008 (which also include a mix of cash, stock and now this pool of assets). This "Partner Asset Facility" is made up of particular types of loans and commercial mortgage-backed securities which are like the residential mortgages that banks bundled together and sold to investors, but instead are made up business loans to, for example, an owner of an office building in Japan. If the value of the $5 billion rises, then these employees would receive a bigger bonus over the 8 years the program will exist, the length of time it will take for all the loans to be paid.  And if the value of these loans drops even further, then the managers will see their bonuses drop.  What a concept.  Pay for performance. "Compensation is being scrutinized more closely than ever before in the changed environment," wrote Chief Executive Officer Brady Dougan and Paul Calello, CEO of the investment bank in a memo sent to employees.  "We…need to demonstrate that we are a responsible player in our industry by providing a new, viable, thoughtful solution to compensation ahead of many of our peers."
For the bank, it now won’t take the hit if the value of this pool of loans continues to drop, the employees will.  And as the loans are paid back, the bank gets paid first and then it pays out to employees.  This will free up money for the bank to use elsewhere, like, making loans, instead of hording it worrying about additional losses. But this is Wall Street, so nothing is ever that simple. The employees will be responsible for a portion of the drop in the value of these assets to a certain level.  After it hits the predetermined low point, the bank will step back in and take the remaining loss.  Considering these loans have already dropped to $.65 on the dollar, the bank does not expect the loans to drop much further. So too do the executives. We won’t know how much this $5 billion represents of the total amount of assets the bank has like this until February when the company reports earnings.  And we don’t have specifics about bonuses at Credit Suisse at this time as the company hasn’t made the final decisions yet.  The bank already announced that its top executives will not receive bonuses this year after it lost $2.8 billion in losses in October and November. Also, Credit Suisse has not received any money from the government’s $700 billion TARP program.