One bank’s solution for junk securities: bonus payments

The bank will use leveraged loans and commercial mortgage-backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. ‘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,’ CEO Brady Dougan and Paul Calello, CEO of the investment bank, said in a memo. The securities will be placed into a so-called Partner Asset Facility, and affected employees at the bank will be given stakes in the facility as part of their pay. Bonuses will take the first hit should the securities decline further in value. ‘It’s monstrously clever,’ said Dirk Hoffman-Becking, an analyst at Sanford C. Bernstein Ltd. in London. ‘From a shareholders’ perspective it’s great because you’ve got rid of some of the assets and regulators will be pleased because you’ve organized a risk transfer.’ For employees, ‘there’s some upside in there and if the alternative is nothing, it’s a lot better than nothing,’ he said. Employees will receive semi-annual coupon payments on their investment in the Partner Asset Facility at the London Interbank Offered Rate plus 2.50 percentage points. The ultimate value of the facility will be determined over the next eight years as the loans and securities mature or default, the people said.