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But bankers are now paid in stock

Executives at Silicon Valley Bank (SVB) and Credit Suisse took substantial risks. SVB proactively expanded the bank’s deposits, some might say excessively. These depositors were uninsured and undiversified. And back when interest rates were low, the bank invested significantly in US government bonds, which was fine at the time. But when there were signs that interest rates were rising and creating substantial interest rate risk, managers left this portfolio unhedged and unchanged. How come SVB managers took those risks? It seemed that they lacked “skin in the game”.

The risks taken by executives at Credit Suisse were of a different nature, but still substantial. By becoming involved in such companies as the now defunct Greensill and Archegos, the bank’s capital took a hit. The fines it has accrued after facing scandal after scandal have also bitten into its capital. It can be said that those involved also lacked skin in the game.

Their wages are pretty good, sure. But their fortunes are in stock in the bank. How much skin do you want them to have?

Let’s take the SVB example. After its failure, depositors were bailed out, and shareholders made to take losses. So far, so good. Except that some executives at the very top bore almost no losses at all – in fact, they made a profit. They sold their shares two weeks before failure, when there was no public information yet about the state of SVB, so its shares were still high. The problem is that they did this perfectly legally. Here’s how.

Quite, those shares were a significant part of their wage packets. That’s how they got them.

9 thoughts on “But bankers are now paid in stock”

  1. They sold their shares two weeks before failure, when there was no public information yet about the state of SVB, so its shares were still high.

    If that is true it counts as insider trading so a jail term is very possible.

  2. AndyF, not quite..

    The executives filed exactly such a plan; and yet a month afterwards, the public still didn’t know about SVB’s difficulties – so share prices were still high and executives reaped a profit. There is therefore a discrepancy between what the law is trying to achieve and what it does achieve.

    It all depends on the question: “Should they have been more pro-active in warning the public?” or alternatively “How come that that crucially important information did not reach the shareholders?”

    The selling of shares was technically by the letter of the law.
    Whether or not the peeps involved will actually get away with skirting the Edge that close… We’ll see..
    It’s photo finish/VAR territory..

  3. I suppose one alternative would be to say that selling enough of those shares would be constructively resigning as an executive, since you are showing lack of confidence in the bank.

    As an extreme example, selling all the shares you are given as soon as you get them (and can do so, since there are restrictions), would mean you don’t actually have skin in the game after all.

    This was off the top of my head, so no doubt there are problems with it.

  4. If you sell all your shares because you know the bank is toast, but you carry on in your job – you’re effectively trading whilst insolvent. Not legally, of course, because it technically hasn’t happened yet. Similar (non)arguments could be made about fraudulent activities.

    Of course if information was hidden from the recent audits, then something legally naughty might have occurred.

  5. “They sold their shares two weeks before failure, when there was no public information yet about the state of SVB”

    Bollocks. The details of the scale of losses on the bond portfolio were there in black and white in the results which came out in January this year. It should have been obvious then that SVB was a ticking timebomb, yet the market shoved the shares higher. The execs who sold out a few weeks before the crash didn’t need inside information to know the bank was bust, it was all there in the public documents, if anyone cared to actually read them. The stock market obviously didn’t.

  6. @AndyF – “If that is true it counts as insider trading”

    Maybe not. Executives at that level in large companies will often schedule stock sales to be done after a significant delay. This is to ensure that the sale is not based on insider information.

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