Monday, 15 September 2008

Lehman bonuses

Naked Capitalism reports that Lehman staff received $5.7 billion in bonuses in 2007. This weekend, when the bank was in sliding towards the abyss, the market capitalization of Lehman was slightly below $3 billion.

I know I am simplying things a little here, but in principle, the staff could have bought the bank back with their bonuses. It is strange how that option was never seriously considered.

9 comments:

Anonymous said...

I wonder how much tax was paid on all those bonuses! Now if tax was paid at a decent rate (which I somehow doubt), and that were homologated for keeping the incautious sub-prime lenders in their homes and jobs, someone might make a little justice out of all the lies.

B. in C.

Anonymous said...

I'd like to know about the bonuses, particularly:

1. How much of bonuses were paid in stock, and how long do staff have to wait to sell it?

2. Did they pay income tax on the stock award at the value when it was granted (interesting to think they may have lost money on the bonus through paying more tax than they could sell the stock for)

3. How much personal wealth of senior mgt was destroyed by the collapse. I heard one exec had 10 million shares. So a year ago that's nearly $100m. Now its nearer $1m. That's a big loss.

I've generally considered that since they went public, investment banks have just been a conspiracy of senior mgt against clients and shareholders.

Nick

Alice Cook said...

Nick,

I was being provocative. Of course, a large part of these bonuses were paid as options.

Nevertheless, $5 billion plus payout was significant when compared to market capitalisation at the timel.

Alice

Anonymous said...

Alice,

The fairy gold has turned to dust. Taxation of the big players' bonuses is a matter for the IRC.

But buying the bank could not be a serious option because of its massive debts. I don't know the US legal position but knowingly trading whilst insolvent is certainly a crime in the UK.

I agree that the bonuses seemed excessive: perhaps when they were agreed situation looked different and the numbers appeared to add up.

Tough on the small players - I hope the UK staff get their statutory redundancy and contractual pay.

A defect in UK law is no provision to claw back excessive salaries, realised stock options, from failed bankers. There can be no justification for the former head of Northern Rock to keep the reported £14 million from his successful share sale.

I disagree with you that raising interests rates cures inflation. This is a short-to-medium palliative which leads, long term, to lack of competitiveness. If the UK insists, over ten years, in having interest rates on average 1.5% higher than Eurozone - the currency becomes bloated/ overvalued and a correction (devaluation) is inevitable - as we have recently seen. The cure is to CUT interest rates but RAISE TAXES.

I despair of the Labour Party leadership and membership - they seem oblivious to the need to raise taxes to pay for socialist (state control) measures. A tax on second homes including buy-to-let (higher for third etc. house) could have controlled the whole spiral. An independent Housing Agency could have been tasked with setting the tax (with a massive discount for principal residence, a small discount for second residence) at a level to control house prices to broadly the level of price inflation (with a margin). The whole housing boom-and-bust of the last ten years could have been avoided. Proceeds of the tax could have been used in place of the rates, and also to fund social housing. Pensioners could be allowed to roll up the tax, to be paid out of their estate at death.

What an opportunity missed. We now have almost a whole house-building industry lying idle, all because sensible funding cannot be arranged for much needed work.

Keep on blogging,

Cheers,

David

Anonymous said...

All,

Tax laws in the U.S. regarding stock awards are complicated and at times very dangerous to ones financial health.

For instance, if you have vested shares that fall in value (or get wiped out as in the case of Lehman), the long term capital loss can not be used to offset ordinary income. It can be used to offset long term gains if you are fortunate to have any - not likely in a bear market though.

Long term capital losses can also be carried forward and even bequeathed.

Many wall streeters will end up paying income taxes on their salaries and have their net worth wiped out at the same time. Borrowing against vested stock is not unusual here either.

Sackerson said...

How much of the options were realized, at what price and how recently?

Anonymous said...

"The cure is to CUT interest rates but RAISE TAXES."

If you goal is UNcompetitiveness, then yeah, sure, I'm wit' you.

Nick

Joseph George said...
This comment has been removed by the author.
Anonymous said...

David> The cure is to CUT interest rates but RAISE TAXES.

Sure, if you want to complete what the banks have just about failed to do and kill the rest of the UK economy too...
With globalisation, only lower taxes will attract and retain cash-rich corporations and high net-worth individuals.
Joseph George