Credit Suisse pays out bonuses in ‘toxic assets’

Femi Oke: Do you remember all that public rage about our banks that gave their employees bonuses?

Nancy Pelosi on tape: It isn’t right, it just simply isn’t right, when there is a reward, a spelled-out-in-advance reward for those who take undue risk, when they fail they get a bonus, the taxpayer gets the bill.

Femi Oke:That was Nancy Pelosi in March of this year. But Swiss bank Credit Suisse has found a very creative solution to the bonus-paying problem: pay part of your employee bonuses in toxic assets. Toxic assets are all of those bad loans that the banks have made. Jesse Eisinger is a financial writer who has worked at the Wall Street Journal and Portfolio. So, Jesse, just imagine that I work at Credit Suisse for a moment and I’m getting paid toxic assets as my bonus. What do I actually get?

Jesse Eisinger: What you get is an interest in a complex security, all these securities that we’ve heard about. Really what you’re doing is getting an income stream from a bunch of loans that Credit Suisse has made. In fact, you have helped make those loans, and so you’re eating what you cooked. Or as I like to say, you’re eating your own garbage.

Femi Oke:Right, OK. So does that mean that I actually have to pay out any money because I have toxic assets? Do I lose money?

Jesse Eisinger:No, what happens is, you get an interest in a security. So you’ve gotten a bonus and you’ve gotten a bonus half in cash, as you normally did. Instead of stock, this time you got an interest in a loan, in a fixed-income security, and you get an interest payment. If the value goes up, you get part of that as well.

Femi Oke:Ah, I get it. Light bulb moment.
Todd Zwillich: So what’s in it for Credit Suisse? Do they get to unload these toxic assets off their books that they’re giving to employees?

Jesse Eisinger:Exactly. So they get two benefits from this. They get a little nice publicity from financial writers like me who praise them. And then they also got to move the toxic assets off the books. The central problem with the banking system globally, as we know, is that the banks made collectively way too many bad loans to commercial real estate, to residential real estate, to companies that can’t afford to pay them back, and they’re having to take write-downs. So Credit Suisse took a write-down on this collection of loans and gave portions to the employees.

Todd Zwillich: The other thing we know about this global crisis, though, is that nobody knows what toxic assets are worth, and what the market wants to pay for them, the banks won’t accept. So if you’re an employee who just got a bonus in toxic assets, do you have any clue what it’s worth, if anything?

Jesse Eisinger:That’s exactly the crux of the whole issue, and this transaction lends a lot of insight into that. What happened is they priced these at 65 cents on the dollar. Essentially they said, ?All these bundles of loans we’ve taken from all over the world, and we’ve taken commercial real estate, and we’ve taken loans to companies, we’re going to price them at 65 cents on the dollar.? And that sheds a lot of light on what they may be worth, what the banks think they may be worth, when they’re trying to sell them in the Geithner plan that we’ve heard so much about. Maybe they’re worth 65 cents on the dollar, but we don’t really know. At least the banks think, at least Credit Suisse thinks, that this kind of loan is worth this to the employees. Now, residential real estate securities are going for much less now, sometimes 20 or 30 cents on the dollar, so this is a lot higher than those really toxic assets. There are degrees of toxic assets.

Femi Oke:Do you think they were exaggerating how much they’re worth just to make their employees feel a little better perhaps?

Jesse Eisinger:This presented this interesting negotiation, because the employees now are pitted against the employer. The employees want them to be marked down as low as possible, so that they’re paying essentially the lowest price and then they get the appreciation. The employer has the interest of paying them in a higher price, so if they got them for 25 cents on the dollar, they’d obviously have more upside than if they got them at 90 cents on the dollar. And they ended up with this compromise and they tried to be disinterested in how they arrived at it. We’ll see if it’s too optimistic or not. It’ll take about five years for it to play out.

Femi Oke:Has this ever been done before, Jesse?

Jesse Eisinger:No. The banks haven’t really faced this problem in this kind of scale before, so they haven’t had this kind of toxic asset problem before. Credit Suisse is the first to do this, and to my knowledge they’re the only ones to do this. The problem with pay, as Nancy Pelosi pointed out, is all the bankers were incentivized to solely perform on a short-term basis. They had extraordinary myopia. They only were paid on the basis of producing loans rather than how the loans performed. This goes to the heart of solving that problem, but it won’t really solve it because no bank has the interest of acting unilaterally. Credit Suisse, they did this, this is a one time deal, it was very good that they did this, but no bank is really going to really, sort of, jump into this and give their employees less money or money in difficult-to-price assets again. And that’s why I think pay should really be regulated.

Femi Oke:Jesse Eisinger. He’s a financial writer who has worked at the Wall Street Journal and Portfolio. Jesse, I understood you for five complete minutes. Congratulations. Thank you so much.