Credit Suisse has hatched a cunning plan to avoid public condemnation over executive bonuses this year: it is going to pay top managers not in cash, but in the toxic mortgage assets that caused the credit crisis.
Thousands of managing directors and directors will be handed a slice of a new internal hedge fund, into which the bank is transferring some of its $5bn (£3.3bn) in illiquid investments.
These are the complex mortgage derivatives and leveraged loans whose collapsing value has cost the global finance industry $800bn in writedowns in the past 18 months, triggered recessions around the world and caused a public outcry over Wall Street excess.
Credit Suisse is the first bank to use the debt to pay employees, who were told about the plan in a memo from Brady Dougan, the chief executive, and Paul Calello, the head of the Zurich-based investment bank. "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," they wrote.
The new Partner Asset Facility is expected to be run as a mini-hedge fund and could take on debt of its own from Credit Suisse. If the troubled assets rebound in value, employees stand to gain from future payments; if they decline, it will be the value of employee bonuses that will be eroded – Credit Suisse will not have to book the losses.
This makes the scheme particularly attractive for a bank that has been struggling to offload tens of billions of dollars of illiquid credit instruments.
Participants in the fund will receive a small twice-yearly interest payment on the bonus, but will only be able to get their hands on the cash in five years, if the fund has any value left.
Credit Suisse's move is the biggest shock so far in an already-traumatic bonus season for Wall Street employees. Most banks are significantly scaling back the size of their payouts, even for relatively junior employees, and the payments are more likely to be made in shares than in cash this year.
Goldman Sachs was reported yesterday to have slashed the value of bonuses to its partners by 80 per cent after reporting its first quarterly loss since the Great Depression.
Credit Suisse said earlier this month that it would cut 5,300 jobs and cancel bonuses for top executives after saying it suffered new losses totalling $2.8bn in October and November.