The toxic-asset bonuses given to senior Credit Suisse Group AG bankers at the depths of the 2008 financial crisis are turning out to be almost as good as gold.
Credit Suisse employees who got $5.05 billion of junk-grade loans and commercial-mortgage-backed bonds in late 2008 as part of annual bonuses have reaped gains of 75 percent on the payouts since the end of that year through Nov. 30, people with knowledge of the results said. Gold futures returned 98 percent in the period, while Credit Suisse’s shares declined 23 percent.
The gains, which also beat the 4.8 percent return of two-year Treasuries, show how the rebound in debt markets from the lows of 2008 has sweetened the Zurich-based bank’s executive bonuses compared with the cash and stock bonuses rivals paid.
“It worked out in favor of the employees,” said Ann Rutledge, a former Moody’s Investors Service analyst who’s now a principal at R&R Consulting in New York, which rates mortgage bonds and other asset-backed securities. Looking back, “market valuations would have been at all-time lows” when the internal asset pool was set up.
The stock-beating performance may help explain why Credit Suisse employees were eager to invest in a $450 million pool of residential mortgage bonds the bank created last month. Credit Suisse loaned employees the money to buy shares in the fund, and demand was so great that the bank could only fill 90 percent of the orders, the people said.
Chief Executive Officer Brady Dougan, now 52, said in December 2008 that the decision to transfer the assets to staff would position the firm “well for 2009” and strike the “appropriate balance” between employees, who might otherwise have suffered steeper pay cuts, and shareholders, who would have borne the risks of further declines.
The company, which posted a loss of 8.2 billion francs ($8.8 billion) for 2008, recovered the following year with a 6.72 billion-franc profit. Suzanne Fleming, a company spokeswoman, said the fund’s results are private.
The Partner Asset Facility, or PAF, as the internal employee fund is known, has maintained gains even as the European sovereign-debt crisis weighed on Credit Suisse’s stock price. The bank’s shares, which surged 80 percent in 2009, tumbled 26 percent in 2010 and 41 percent last year.
Shares in PAF were given to about 2,000 senior Credit Suisse employees as part of their 2008 year-end bonuses, people with knowledge of the plan have said. The employees were given $800 million of equity in the fund, with Credit Suisse providing $4.25 billion of loans to bolster the fund’s buying power, the people said.
Drop Before Gain
While the plan relieved shareholders of risks, the timing proved to be a windfall for the employees. The S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks prices for loans to companies with junk-grade credit ratings, fell that month to a record low of 59 cents on the dollar.
Initially, the value of the PAF shares fell, people with knowledge of the results said. As of February 2009, the equity in the PAF held 90 percent of its initial value, they said.
Then markets recovered. By May 2011, the value had doubled over the original, before sliding to the 75 percent gain estimated as of November, the people said.
The leveraged-loan index traded at 92 cents as of Jan. 13.
It could have turned out worse for the employees, said Anthony Sanders, a former Deutsche Bank AG analyst who’s now a finance professor at George Mason University in Fairfax, Virginia. Had the prices for leveraged loans or commercial mortgage-backed securities, known as CMBS, continued to plunge, “they would have gotten absolutely annihilated,” he said.
Subject to Change
The ultimate value of the PAF fund, overseen by Credit Suisse Managing Director Jonathan McHardy, won’t be determined until 2016, one person said. For now, employees’ investments are locked up, and their final payouts may change.
As of Nov. 30, assets in the PAF had been reduced to $2.6 billion, as some of the bonds and loans were paid off or sold, the people said. The equity is now estimated by the fund’s administrators at $1.4 billion.
In December, as the ratio of debt to equity in the fund shrank to less than 1-to-1 from more than 5-to-1, Credit Suisse set up the second fund, known as Expanded PAF. The move allows Credit Suisse to rid itself of residential mortgage bonds, while giving the employees a chance to use borrowed money to increase returns on their total investment, the people said.
As with the original fund, assets were transferred to the new fund at their estimated market value, people with knowledge of the matter said.
The mortgage market may be ripe for improvement, Sanders said.
“If you take a look at the data, housing prices are starting to stabilize,” Sanders said. “You’re starting to see a slowdown in serious delinquencies. So it’s like the CMBS play, it’s probably a good time.”