Credit Suisse Bonuses to Include Bonds Made From Derivatives

Credit Suisse Bonuses
A sign sits above the entrance to Credit Suisse Group AG's headquarters in Zurich. Photographer: Gianluca Colla/Bloomberg

Credit Suisse Group AG plans to pay a portion of senior employees’ 2011 bonuses in bonds backed by derivatives, reviving a maneuver from 2008 that helped the firm dispose of risky assets while preserving the value for staff.

“We are trying to strike the right balance and align employees with shareholders,” Chief Executive Officer Brady Dougan wrote in a memo to staff. It’s “a risk transfer from the firm to employees.” Suzanne Fleming, a spokeswoman for Zurich-based Credit Suisse, confirmed the memo’s contents and declined to comment further.

Credit Suisse created the derivative-bond bonuses, which employees will receive in addition to cash bonuses and restricted stock, after a drop-off in trading and deal-making in 2011 led the biggest Wall Street firms to rein in compensation. In 2008, during the depths of the U.S. financial crisis, Credit Suisse gave employees shares in a $5.05 billion pool of junk-grade corporate loans and bonds backed by commercial mortgages.

Banks including Goldman Sachs Group Inc. and Morgan Stanley cut bonuses after anxiety about Europe’s sovereign-debt crisis helped depress profits and share prices last year. Morgan Stanley also increased the percentage of 2011 pay packages deferred to future years to 75 percent, from 40 percent two years ago, people briefed on the matter said last week.

Bonus Bonds

Credit Suisse, Switzerland’s second-biggest lender, is among European banks that face pressure from regulators to bolster capital, the cushion of equity between a bank’s assets and liabilities that’s meant to protect depositors and senior creditors.

Banks seek to comply with regulators’ demands partly by divesting illiquid loans and fixed-income securities. Europe’s lenders have pledged to cut more than 950 billion euros ($1.2 trillion) of assets over the next two years.

The new Credit Suisse bonus bonds are backed by “a diversified portfolio of derivative counterparty risks” linked to about 800 entities “spread across industries and geographies,” Dougan, 52, wrote in the memo. The portfolio covers about 18 percent of the credit exposure in the firm’s derivatives business and is 94 percent investment-grade, Dougan wrote.

“It is important to adapt quickly to the new requirements and environment so that we get to a sustainable business model,” Dougan wrote. “Accelerating our strategic evolution will be a tremendous competitive advantage in the coming years.”

Absorb Losses

The memo didn’t specify the amount of the bonds to be awarded to employees or the total amount of assets included.

Credit Suisse will absorb the first $500 million of losses on the portfolio, reducing the risks for employees, according to the memo. The bonds mature in nine years and will pay a coupon of 5 percent for Swiss franc holders and 6.5 percent in U.S. dollars “for holders elsewhere,” Dougan wrote.

By comparison, 10-year U.S. Treasuries currently yield about 2.1 percent.

“This is an at-risk investment, but our best estimation from actual experience is that this will pay its interest and principal in full,” Dougan wrote in the memo.

The toxic bonuses awarded in 2008 turned out to be almost as good as gold, returning 75 percent from the end of that year through Nov. 30, compared with 98 percent for the precious metal, people with knowledge of the results said. Credit Suisse shares tumbled 23 percent in that period.

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