How to Deleverage Balance Sheets

Bouncing around trading desks:

Credit Suisse is using a novel approach to deleverage its balance sheet…using its illiquid assets to pay bonuses; using leverage loans and CMBS to pay compensation packages for MDs and directors. The securities will be places in a fund called Partner Asset Facility and employees will be given stakes in the facilities. Bonuses will be the first loss piece if prices fall further. The bank will boost potential returns by providing leverage to the facility. Assets will be held on balance sheet and employees will be paid semi annual coupons at L+250bps. The facility will be in place for 8 years.

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UPDATE: December 18, 2008 4:26pm

I assumed this was a goof — until someone sent me a link to this — its real!

Credit Suisse Group AG’s investment bank has found a new way to reduce the risk of losses from about $5 billion of its most illiquid loans and bonds: using them to pay employees’ year-end bonuses.

The bank will use leveraged loans and commercial mortgage- backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. The new policy applies only to managing directors and directors, the two most senior ranks at the Zurich-based company, according to a memo sent to employees today.

“While the solution we have come up with may not be ideal for everyone, we believe it strikes the appropriate balance among the interests of our employees, shareholders and regulators and helps position us well for 2009,” Chief Executive Officer Brady Dougan and Paul Calello, CEO of the investment bank, said in the memo.

The securities will be placed into a so-called Partner Asset Facility, and affected employees at the bank, Switzerland’s second biggest, will be given stakes in the facility as part of their pay. Bonuses will take the first hit should the securities decline further in value.

“It’s monstrously clever,” said Dirk Hoffman-Becking, an analyst at Sanford C. Bernstein Ltd. in London who has a “market perform” rating on Credit Suisse stock. “From a shareholders’ perspective it’s great because you’ve got rid of some of the assets and regulators will be pleased because you’ve organized a risk transfer.”

Monstrously clever indeed.

Source:

Credit Suisse to Use Illiquid Assets to Pay Bonuses
Christine Harper
Bloomberg, Dec. 18 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=auEEfFRNdqcs&