Quelle Surprise! Top Brass at Failed Firms Profited Handsomely

The New York Times discusses a study (supposedly released, but the paper has yet to be posted) by corporate governance expert and Harvard Law School professor Lucien Bebchuk (along with Alma Cohen and Holger Spamann) on how much the top echelon at failed firms Bear Stearns and Lehman really suffered when their firms imploded.

The study rebuff the widely-held notion that the top executives suffered in a way that made a difference on a practical level. If you net worth goes from, say $200 million to a mere $100 million, the loss of 1/2 of one’s wealth at that level is not going to have a proportionate impact on one’s lifestyle:

“There’s no question they would have done massively better had their firms not collapsed,” said Lucian Bebchuk, one of the study’s authors. “But the wealth of those top executives was hardly wiped out. The idea that they were devastated financially has kind of colored the picture people have about what payoffs they were facing.”

Moreover, the research notes that the leaders of the firm had sold a fair proportion of the total shares they received prior to the crisis and discusses (as we have) that the proposed pay reforms are not much different from the measures in place at these firms pre-blowup:

Though the chiefs at both investment banks lost more than $900 million in their stock holdings, the professors argue that it is important to also consider all the riches the bankers took off the table in the years preceding the crisis.

At Lehman, the top five executives received cash bonuses and proceeds from stock sales totaling $1 billion between 2000 and 2008, and at Bear, the top five received more than $1.4 billion…

Many of the solutions that policy makers and regulators are considering for Wall Street pay are tactics that were already in place at Lehman and Bear. Both firms required executives to wait several years before selling their stock. Both firms paid heavily in stock…

However, the Harvard study says the executives may have had reason to focus on the short-term prices they could attain with stock selling.

The Times nevertheless manages to find some ridiculous counterarguments:
Some compensation experts said over the weekend that the study did not seem to prove that compensation caused the crisis and that it instead just pointed out that the bankers were wealthy.

“I don’t think anybody would question that they were well compensated,” said René Stulz, a professor at Ohio State University who has studied bank compensation. “It’s certainly true that the incentive effects are different if you’re already very wealthy, but that does not mean that the incentive effects are not there.”

It is simply amazing that people can throw out opinions like that and demonstrate their utter ignorance of how the industry once worked. Prior to 1970, all NYSE members had to be partnerships (and in those days, stock brokerage provided the bulk of industry earnings). That meant partners had their wealth tied up in the firm. The line at Goldman was that partners lived poor and died rich. When someone (back in the early 1980s, when comp levels were much lower than today) a top performing non-partner might make $600,000 to $700,000 a year. When he made partner, his take-home pay dropped precipitously to perhaps $100,000-$150,000 a year. New partners were under pressure to increase their ownership stake (by becoming even more productive) so they could get increase the cash potion of their comp. Moreover, if a firm went bankrupt, as Lehman did, the partners were personally liable. The creditors could seize their personal wealth. It would be impossible to see the pattern that Stulz noted, of top management being wealthy post bankruptcy.

And those pay based incentives DID matter. Goldman was incredibly risk averse, both from a legal standpoint and in how it was cautious about deploying its capital (that does not mean it was not greedy, please, but was greedy in ways that had low odds of hurting its franchise). The firm as a public company bears little resemblance to what it was as a partnership.

Don’t you think if you could lose pretty much all you ever made in very short order (recall Bear imploded over a mere two week period), that it would make you VERY mindful of what not just your subordinates, but also your partners were up to? It certainly did when the firms were privately held, and there is no reason to think it wouldn’t today. But now that Wall Street is hooked on other people’s money, there is no turning that clock back.