At Credit Suisse, Toxic Bonuses Turn into Gold

Credit Suisse employees feast on beaten-down loans and bonds

At the depths of the financial crisis, senior bankers at Credit Suisse Group received $5.05 billion of junk-grade loans and commercial-mortgage-backed bonds as part of their annual bonuses. Those assets, considered long-shot investments when they were transferred to an internal employee fund in late 2008, offered the Swiss investment bank a way to shift risk off its books—while giving the employees a chance to benefit from any recovery in that market.

It turned out to be the sweetest of deals: The assets have delivered gains of 75 percent since the end of that year through Nov. 30, people with knowledge of the results say. During that same period, Credit Suisse’s shares declined 23 percent.

Now the bank is doing it again. After a drop-off in trading and dealmaking last year led the biggest Wall Street companies to rein in compensation, Credit Suisse announced plans on Jan. 23 to pay a portion of senior employees’ 2011 bonuses in bonds backed by derivatives, which employees will receive in addition to cash and restricted stock. “We are trying to strike the right balance and align employees with shareholders,” CEO Brady Dougan wrote in a memo to staff. It’s “a risk transfer from the firm to employees.” Credit Suisse will absorb the first $500 million of losses on the portfolio, reducing the risks for employees, according to Dougan’s memo. Suzanne Fleming, a spokeswoman for Zurich-based Credit Suisse, confirmed the memo’s contents and declined to comment further.

In December 2008, Dougan said the bonus plan would strike the “appropriate balance” between employees, who might otherwise have suffered steeper pay cuts, and shareholders, who would have borne the risk of further declines if the bank had kept the assets on its books. The timing proved to be excellent for the employees, who in effect were buying when “valuations would have been at all-time lows,” says 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. “It worked out in favor of the employees.” The Partner Asset Facility, or PAF, as the internal employee fund created in 2008 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.

The 2,000 participants in the PAF fund, overseen by Credit Suisse Managing Director Jonathan McHardy, aren’t cashing any checks yet. The final value of shares won’t be determined until 2016, one person said. For now, employees’ investments are locked up, and their final payouts may change. Yet Credit Suisse is expressing confidence in the concept. Speaking about the new bonus bonds, Dougan wrote: “This is an at-risk investment, but our best estimation from actual experience is that this will pay its interest and principal in full.”


    The bottom line: Credit Suisse employees who got shares in a $5.05 billion fund of toxic assets as part of their 2008 bonuses are seeing 75 percent gains.

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