Big LBOs are teetering, but Wall Street still planning record bonuses
Filed under: Columns, Economy, Moody's Corp.
Wall Street has a short memory when it comes to pay. That's what came to mind when I saw a report saying that many big leveraged buyouts (LBOs) are in trouble -- four of the 10 biggest companies bought in leveraged buyouts have stopped paying back the money they borrowed. Nevertheless, Wall Street will pay itself record bonuses in 2009.
Unless my memory is failing me, it was only 14 months ago that Wall Street nearly went bankrupt. Without trillions of dollars in taxpayer money, it's highly unlikely that it would be in a position to pay itself $140 billion in bonuses this year.
Today, The New York Times offers new insights on where those record-breaking bonuses will go. The biggest bonus recipients are the ones bringing in the cash this year. So traders, who are now making the big short-term profits, will get the biggest bonuses -- fixed income traders will make on average $930,000 in cash and stock, 34 percent more than last year.
By contrast, those folks in private equity will suffer, getting paid 20 percent to 25 percent less this year. But that's not because they closed these lousy LBO deals. It's because their business is still in the doldrums. It goes without saying that nobody will force those LBO-deal-doers to repay the bonuses they earned from making those big lousy LBO deals.
And the nature of those LBO deals is creating big problems for the banks that lent to them. How so? The Times reports that Moody's (MCO) concluded that 19.4 percent of companies bought by the 14 largest private equity firms from January 2008 to September 2009 have defaulted -- a slightly higher default rate than the 18.6 percent default rate for similarly rated companies.
Moody's highlighted two private equity firms -- Cerberus and Apollo -- as the worse performers. Four of Cerberus's six buyouts are in distress or in default, and about two-thirds of Apollo's companies are in equally dire straits.
But since those private equity firms put so little equity in their deals, their investors won't lose much. Instead, the risk is with the people who lent money to the deals when times appeared to be good. Now those lenders will either get stiffed completely or exchange their old, useless paper for shiny new paper.
Meanwhile Wall Street moves on. The fixed-income traders making the big bucks this year will get their record bonuses. And the money makers of yore, the buyout guys, will have to take a little hit -- while shifting the cost of their bad bad decisions onto someone else. And if 2009's fixed-income trades go bad next year, expect no clawback of this year's big bucks bonuses.
Heads I win, tails you lose.
Peter Cohan is a management consultant, Babson professor and author of nine books, including Capital Rising (due in June 2010). Follow him on Twitter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
11-06-2009 @ 8:57AM
AnimalsHaveCars said...
HA HA HA, Jokes on us..
How's that HOPE and CHANGE working out for us????
Reply
11-05-2009 @ 2:06PM
karen conterio said...
Donations are greatly needed and highly appreciated. ;-)
Selfinjuryfoundation.com 501 (c) (3)
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11-05-2009 @ 2:10PM
glenn said...
record bonuses on wall st. oh yeah,, that's surprising.
Reply
11-05-2009 @ 2:21PM
SAMK said...
HOW IN THE HELL CAN THIS GOVERMENT LET THIS HAPPEN AFTER USING TAX PAYERS MONIES NOW THE GOV,REALY NEEDS TO STEP IN
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11-05-2009 @ 2:50PM
billcarol88 said...
Who is going to stern up the bunch of crooks that are in now. NOT.
Wall street donated way to much to this bunch of crooks to get them elected so no way will they stern up and go against the money being donated.
Reply
11-05-2009 @ 3:41PM
WRBNYC said...
You are mistaken in the passage quoted below. Almost all private equity funds contain "clawbacks" -- the sponsors have to give back the profits they made on a winning deal if losing deals lower the average return of the fund. So the private equity guys take a hit when their deals go bad. That's not the case for most hedge fund guys and investment bankers!
"It goes without saying that nobody will force those LBO-deal-doers to repay the bonuses they earned from making those big lousy LBO deals."
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11-05-2009 @ 3:55PM
Don said...
This is an outrage and we the people of the United States need to get on the phone and call, email, fax these idiots in Washington D.C. and demand legislation that bans campaign contributions and lobbyist activity. Without the financial incentives maybe these bastards will finally consider what is best for the public interest instead of the greedy corporations and most of all the banksters.
END THE FED
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11-05-2009 @ 8:20PM
Suzy said...
That's why there should have been strings attached to the
bail-out bucks and there could have been some way to
control the blatant selfishness and greed. There will always be those who care about little except for $$$$ and power and
that is why we need regulations to control the greedy.
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11-06-2009 @ 12:03AM
RIRISH said...
Walls streets punches to the publics face dont seem to stop.
Not only is our money used but they are giving it out in bonuses...AGAIN.
What about giving it BACK first if you made that much!!!
German people who lived during WW11 claim the reason Hitler was so popular in 1939 was the people were in a terrible depression, didnt know where to turn, and it was due to the "money lenders"
(Sound familiar?)
And then today I see on tv that Goldman Sacks has gotten a shipment of H1N1 shots for its employees.
Why? Are they all pregnant? All 3 years old and under?
That is just wrong in every way.
How many blows will it take before Mr Everyman has enough with these greedy megalomaniacs.They should be in jail not receiving any kind of bonus.
They knew what would happen in the end and didnt care as they were making huge amounts of money for themselves.
Then cry to the littel guy to save their A-- and then do the same thing again a year later with OUR money.
What kind of humans are these with no concience? No ethics?How do they look in the mirror.
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