Bankruptcy case reveals pre-crash pay for 50 employees that shocks even Wall Street veterans. By Walter Hamilton, Andrew Tangel and Stuart Pfeifer, Los Angeles Times 5:00 AM PDT, April 27, 2012 Less than a year before the 2008 collapse of Lehman Bros. plunged the global economy into a terrifying free fall, the Wall Street firm awarded nearly $700 million to 50 of its highest-paid employees, according to internal documents reviewed by The Times. The documents, which were among the millions of pages submitted in Lehman's bankruptcy, show the list of top earners each were pledged $8 million to $51 million in cash, stock and other compensation. How much, if any, of the stock was cashed in before the bankruptcy wiped out its value couldn't be determined. Still, the rich pay packages for so many people raised eyebrows even among compensation experts and provided fresh evidence of the money-driven Wall Street culture that was blamed for triggering the financial crisis. "Many people are going to be stunned at how well some people were being paid," said Brian Foley, an executive compensation expert in White Plains, N.Y. "This wasn't a matter of five or six people being paid a lot." The documents were obtained by the government-appointed court receiver overseeing the firm's bankruptcy and were reviewed by The Times. Lehman filed for Chapter 11 protection in September 2008 in what would become the largest bankruptcy in U.S. history, sparking the biggest financial meltdown since the Great Depression. The investment bank buckled after betting heavily on subprime mortgages to people with shaky credit, which became worthless as housing prices tumbled and the borrowers stopped paying their loans. Before the fall, when housing prices were booming, mortgage-backed securities were one of the hottest investments on Wall Street. The ravenous appetite for these securities, and the rich commissions reaped by those selling them, encouraged the underwriting of ever-riskier loans that failed when the housing bubble popped, according to the federal Financial Crisis Inquiry Commission. The Lehman documents provide a rare peek into Wall Street compensation practices, because federal regulations require salary disclosure of only the five highest-paid officers of a corporation. The documents reveal, to the dollar, the pay packages promised to individual traders and investment bankers at Lehman — a well-kept secret up to now. The records illustrate that enormous pay wasn't limited to top executives but was dished out to a wide range of traders and others who sometimes took home even bigger paychecks than the CEOs who ran their companies. The documents show total compensation but don't provide a breakdown of salary levels, stock or cash bonuses. The Lehman bankruptcy meant that most of the 50 executives on the list probably did not get their full stock-based compensation. Lehman's richest pay package in 2007 went to Robert Millard, who was in line to make $51.3 million running a group that invested the firm's own cash, according to the documents. That topped the $40 million pledged to Lehman Chief Executive Richard Fuld. Millard's pay package in 2005 was $3.8 million before catapulting 1,084% to $44.5 million the following year, according to the documents. Now running a hedge fund, Millard said he was never fully paid in 2006 and 2007. He said more than half of the compensation came in the form of stock, which was rendered worthless by the bankruptcy. "Lehman Bros. lost a whole bunch of money doing other things," said Millard, who now leads New York-based Realm Partners. Wall Street critics say the rich pay deals show how the short-term trading mentality had taken over the financial industry a few years ago. "The numbers are shocking but consistent with the fact that in some ways Wall Street has been run as a casino for extracting money from the real economy and using it to pay extraordinary high levels of compensation — one might say obscenely high — to a small number of people," said Lisa Donner, executive director of the advocacy group Americans for Financial Reform. Marvin Schwartz, a managing director in Lehman's asset management group, was second to Millard on the newly obtained list. He was allotted $31.1 million in 2007, $27 million in 2006, and $19.3 million in 2005, according to the documents. He is now a portfolio manager at investment firm Neuberger Berman. Jonathan Hoffman, who worked at Lehman's global rates trading desk, was awarded a $30.9-million pay package in 2007, according to documents. He was promised $19.9 million in 2006 and $14.8 million a year earlier. Schwartz and Hoffman declined to comment. Also among the highest compensated was Mark A. Walsh, who made $70 million over three years running the firm's global real estate business. He was allotted a pay package of $17.5 million in 2007, according to the documents. Once considered a star, his increasingly aggressive bets eventually backfired on the firm and led to more than $30 billion in bad real estate deals by 2008. He could not be reached for comment. The pay figures outraged Lehman alumni, who have been buzzing about what they see as the excessive compensation doled out to select people. "Even those of us who worked on Wall Street are surprised at these numbers," said one former Lehman executive who declined to be named because of the sensitivity of the matter. "We had no idea so many people were making so much money." The documents also demonstrate the misplaced optimism that reigned in Lehman's executive suite, with some managers pushing for the company to boost compensation to reward employees and poach talent from wounded rivals. Among the documents reviewed by The Times was a confidential presentation that Fuld and other senior executives made to the firm's compensation committee. The six-page report recommended that Lehman increase its compensation budget to pick off talent at rival banks that "have sustained large losses, weakening their competitive position." One plan called for handing out an additional 25 million stock options on top of the 54 million already distributed in 2007 and the 30 million set aside for future awards. "Banking is a cyclical business — we've been through challenging years before and we'll get through this one as well," Gary Weinstein, an executive in Lehman's investment-banking unit, wrote in a memo. "The important thing is to not lose focus on building the franchise — we've made great strides and are well positioned heading into a period of market slowdown." http://www.latimes.com/business/la-fi-compensation-20120427,0,6481155.story
This isn't really true, unless by 'cyclical' you mean dying. The large banks became unprofitable in the mid 80s as going concerns. The primary reason was risk of bankruptcy (which incurred counterparty risk). Banks won't lend to each other in the real world, if there is a chance the funds will get tied up in a bankruptcy -- even if they are sure to get the money back, they can't afford to lose the liquidity. Thus, in the 80s, the Shadow Banking System evolved, which created 'robot entities' (paper corporations) that only existed to hold securitized debt -- see for example, CDOs [collateralized debt obligations]. The *entire* point of this arrangement was to get the assets banks hold into a structure such that *if* the debt was bad, it would not trigger new capital requirements on the bank, possibly forcing it into bankruptcy. deep dive: Japan has been there and this slope knows the shit: http://www.businessinsider.com/richard-koo-the-world-in-balance-sheet-recession-2012-4 ADDED: do take a look at slide 25, where he points out that the problem is Democracy, and an 'Authoritarian' government can solve the problem without opposition. tl;dr: Banks have not been profitable, going concerns, as of the Reagan era, *unless* they laid off their debt on the Shadow Banking System like a revolving door. In 2007, the SBS collapsed, ergo Banks are no longer solvent and never will be. Cyclical be damned. The smash up of the SBS, which has *never* recovered (4.0 down from 400-500.0 -- see the table at the CDO link... basically flat-lined still), makes the smash up of the banking system as we now know it inevitable. The Jewing is in the details though, as they say. The alternative is that the gummint and the Fed will simply take over managing the banking system, overtly or covertly. Talk about Socialism. As a side note, the SBS isn't entirely gone -- just the part that used Mortgage Backed Securities for securitization. It is limping along on automotive debt (think GMAC; to a small extent) and *mostly* on Student Loan debt -- which is basically government guaranteed. Can we really build an entire economy on the promise that if Rastus goes to college he'll get a high paid job and replay his student loans? 50% of recent grads are unemployed a year later, and you can bet those numbers will just get worse when Rastus and Clancito go head to head with wages in Asia. Basically, the current arrangement has the gummint covertly backing what is left of the SBS (and thus the banks...) underwriting the 'securities' entirely, predicated on a promise to edumacate Rastus and make him productive. No prizes for guessing how that will work out.... Moral: we are facing a permanent decrease in standard of living, a healthcare crisis as the Boomers get old and die [hint: all the jobs will be changing bedpans, which doesn't require a college degree], the Trillion dollar debt pyramid (now exceeding the total credit card indebtedness -- think the now defunct M3!) that is propping banks up is about to collapse anyway, since unemployment among yoofs is already similar to Spain's, and we are all going to pay our respects to Mr Little Depression 2.0 in the next 5 years.... then the fun begin. Itz Comin'.
http://www.workers.org/2008/us/lehman_1030/ The above article fails to point out that the Lehman Bros who founded the firm also dealt in nighor slaves.
Sources for the article include the Black Holocaust Museum of Slavery in PhiladelphiaFile under future plans?