Sunday, January 31, 2010


BANZAI7 INSTITUTE--Investment bankers in the U.S. have begun using equity derivatives to convert restricted shares paid as bonuses into cash, side-stepping new guidelines on remuneration which were designed to prevent bankers cashing out for at least three years, according to a headhunter.

The bankers are using over-the-counter equity derivatives strategies such as call options, put options and collars to "monetise" (a Wall Street euphemism for innovative swindling) their shares now, albeit at a discount to what they would receive if they waited for the restrictions to lift.

The revelation comes as global regulators seek to put an end to large cash bonuses in favour of deferred awards which tie bankers' compensation to long-term performance.

The senior managing director of U.S. business services firm Secretive Solutions, said some top earners at investment banks have negotiated to receive the shares component of their bonuses in restricted stock that is already vested or soon to vest. The stock is still subject to restrictions, for example on when it can be sold in the open market. However, because it is vested, they are able to turn it into cash by trading derivatives.

"Rather than wait three or five years for the restrictions to pass, bankers would rather take a discount of up to 50% now just to get out and do something else."

WB7: Bankers would rather take a discount of 50% now just to get out and do something else? What does this say for the state of our financial system? Cheap employee loans, derivative cash out strategies, here you have a unique opportunity to learn the meaning of regulatory arbitrage (a Wall Street euphemism for skirting the law). They can't help it, its in their nature.

The issue is not cash versus contingent compensation. They real issue is why do we continue to encourage the huge misallocation of human capital caused by oversized compensation packages for financial three card monte artists.

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