Remember how we've been told that it wasn't twisted incentives that caused Bear Stearns and Lehman Brothers executives to take excessive risks? Those executives, the conventional narrative has it, were paid largely in stock that plunged in value when their companies collapsed. The crash, we're led to believe, took them with it.
In fact, the top five executives at each of the two companies did lose hundreds of millions when the stocks fell. But a new study by three Harvard professors - The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 - puts the kibosh on the urban myth that they were devastated financially.
Professors Lucian A. Bebchuk, Alma Cohen and Holger Spamann pointed out in the report that the top five executives at Lehman collected cash bonuses and proceeds from stock sales of $1 billion between 2000 and 2008. The top five at Bear collected $1.4 billion.
We observe that these amounts substantially exceed the value of the top executives’ positions at the beginning of 2000, which we estimate to be in the order of $800 million and $600 million respectively. To be sure, the executives would have made much more had the firms not blown up. ...
Many of the decisions that ultimately led to the failure of the companies, such as the decisions to get heavily involved in the securitized assets markets, were made a substantial period of time before the final collapse. To assess the executives’ incentives when they made decisions that determined the future risks facing their banks, one needs to look at their compensation over a longer period of time. ...
The stories of Lehman and Bear Stearns will undoubtedly remain in the annals of financial disaster for many years to come. To understand what has happened, and what lessons should be drawn, it is important to get the facts right. In contrast to what has been commonly assumed thus far, the top executives of those two firms were not financially devastated by their management of the firms during 2000-2008. They were able to cash out rather large amounts of performance-based compensation, both from bonuses and from share sale, during the years preceding the firms’ collapse. This cashed-out performance-based compensation was large enough to make up the losses on the executives’ initial holdings in the beginning of the period. As a result, the executives’ net payoffs from their leadership of the firm during 2000-2008 were decidedly positive.
But Peter J. Solomon, an investment banker who used to work at Lehman, said the executives who presided over Wall Street’s collapse have suffered, despite the money they retained. ...
"There’s not one person involved in the demise of Lehman Brothers, Bear or even the troubles that have fallen on Citigroup who thinks they’re living happily ever after," Mr. Solomon said, "because their reputations have been tarnished, and what do you have at the end of the day but your reputation?"
Well, there's the matching Bentleys. And the five-bedroom beach house in La Jolla. And the little chateau in the south of France. And the villa in Tuscany. The Kandinskys. The vintage wine collection. The platinum golf clubs. The Google stock. Half ownership in that champion Brazilian soccer team. And the 60-foot yacht.
At the end of the day, it's true, you may find them lamenting their tarnished reputations over a well-aged single malt. Where you won't find them, unlike many of the victims of their risk-taking, is queued up for food stamps.