I stumbled across a fascinating pierce of research (via a reader) regarding misaligned pay incentives Bear Stearns and Lehman Brothers:

“The standard narrative of the meltdown of Bear Stearns and Lehman Brothers assumes that the wealth of the top executives of these firms was largely wiped out along with their firms. In the ongoing debate about regulatory responses to the financial crisis, commentators have used this assumed fact as a basis for dismissing both the role of compensation structures in inducing risk-taking and the potential value of reforming such structures. This paper provides a case study of compensation at Bear Stearns and Lehman during 2000-2008 and concludes that this assumed fact is incorrect.

We find that the top-five executive teams of these firms cashed out large amounts of
performance-based compensation during the 2000-2008 period. During this period, they were able to cash out large amounts of bonus compensation that was not clawed back when the firms collapsed, as well as to pocket large amounts from selling shares. Overall, we estimate that the top executive teams of Bear Stearns and Lehman Brothers derived cash flows of about $1.4 billion and $1 billion respectively from cash bonuses and equity sales during 2000-2008. These cash flows substantially exceeded the value of the executives’ initial holdings in the beginning of the period, and the executives’ net payoffs for the period were thus decidedly positive.

The divergence between how the top executives and their shareholders fared implies that it is not possible to rule out, as standard narratives suggest, that the executives’ pay arrangements provided them with excessive risk-taking incentives. We discuss the implications of our analysis for understanding the possible role that pay arrangements have played in the run-up to the financial crisis and how they should be reformed going forward.”

And to drive the point home, the authors include this lovely matching table and chart set:

Total Cash Flows from Bonuses and Equity Sales 2000-2008

2000-2008 Performance


It wasn’t just BSC & LEH, it was most of the publicly traded financial firms.

I always found it an amazing coincidence that none of the private partnerships got into any trouble. Coincidence? Perhaps not — from page 136, Bailout Nation:

More importantly, banks started adopting the “eat what you kill” compensation systems. The bonus structure, replete with short-term financial incentives, began to dominate banks. Throw in monthly performance fees and annual stock option incentives, and you end up with a skewed business model suddenly embracing quicker trading profits.

“This had an enormous impact upon the ways investment banks approached business generation and risk management. Like many public companies, they became increasingly short-term focused. “Making the quarter,” in Street parlance, meant pulling out all the stops to hit your quarterly profit figures, by any means necessary. Incentives became misaligned with shareholders’ interests, as risky short-term performance was rewarded with huge bonuses. Not surprisingly, this worked to the detriment of long-term sustainability.

But short-termism was only part of the equation. Of greater concern was how these firms’ internal risk management changed. Unlike in public corporations, partners are personally liable for the acts of any of the members of the partnership. If any one of a firm’s partners or employees loses a trillion dollars, every last partner is on the hook for that money.

As you would imagine, this creates enormous incentives to make sure that risk is managed very, very carefully. Nothing focuses the mind like the real possibility that any partner could bankrupt all the rest. It’s no coincidence that partnerships like Lazard Freres and Kohlberg Kravis Roberts did not suffer the same kind of risk management failures as Bear Stearns and Lehman Brothers, among others. (Lazard went public in 2005, but too late in the credit cycle for it to get into much trouble.)”

The entire Yale Journal on Regulation is worth a browse . . .


Cashing in Before the Music Stopped
Lucian Bebchuk, Alma Cohen, and Holger Spamann, Harvard Law School on Monday Harvard Law School Program on Corporate Governance, December 7, 2009

Bankers had cashed in before the music stopped
Lucian Bebchuk, Alma Cohen and Holger Spamann
FT, December 6 2009

The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008
Yale Journal on Regulation, Forthcoming
Lucian A. Bebchuk, Harvard University – Harvard Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Alma Cohen, Tel Aviv University – Eitan Berglas School of Economics; Harvard Law School; National Bureau of Economic Research (NBER)
Holger Spamann, Harvard University – Harvard Law School

Category: Bailout Nation, Bailouts, Corporate Management, Wages & Income

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “Wages of Failure: Exec Comp at Bear, Lehman 2000-08”

  1. John says:


    I could have driven those firms into the ground for a hell of a lot less money than they paid their executives.

  2. cognos says:

    C’mon… this just looks like bad analysis.

    First – I thought Jimmy Cayne held >$1B in stock all the way to the end? I have seen articles in WSJ and NYT that affirm this. Somehow I doubt this guy gets it right, and they got it wrong. Bad information.

    Second – So what? When companies go down, executives have been over compensated. This is true for dot-com bubble companies, REITs, mortgage brokers, hedge funds, and large I-banks. This is just as true for failed restaurants and lawyers who lose cases. So what, that is life! And it doesnt mean there is some giant “agency problem” … all these people lost alot of money bc of their bad decisions.

    Third – Small financial firms (the “partnerships” you loosely refer to) did just as bad or worse than the major firms. Of the 150+ bank failures, over 100 were <1B in assets. Probably 135 were <5B. Small real-estate and mortgage linked firms DID NO BETTER than large ones. Silly myth.

  3. willid3 says:

    doesn’t that put a nail in the pay for performance narrative?

  4. I can’t quite put my finger on it, but it seems intuitive that, there was something more determinant to BSC and LEH collapse than pay arrangements that encouraged excessive risk-taking. Maybe I’m just naive, but the “enormous incentives” you say were perhaps not coincidentally the reason private partnerships survived the crisis do not seem so enormous when it seems rather safe to assume no executive would willfully drive their firm into the ground on account of compensation to be gained despite reckless risks being taken. In other words, motivated by the posterity of partners or not, it seems reasonable to believe men and women in executive positions foremost have the good of the firm at the top of their concerns. Thus, efforts to paint the situation as being something other than what to me seems intuitive begin to appear like narratives that claim a lone nut could assassinate a heavily guarded President.

  5. Mannwich says:

    But all of that “top talent” will flee to other firms if they aren’t paid mega-millions and billions of stolen bonus money. Let…..them………go.

  6. xon says:


    I just found out that our non-performing second mortgage had been SOLD to another servicer (not a collection outfit, just another servicer). How, exactly, could a non-performing loan be considered a salable asset to an executive who’s incentives were aligned with the long term best interests of the purchasing firm?!

  7. flipspiceland says:

    “…a lone nut could assassinate a heavily guarded President.”

    John Hinckley, shooting Reagan. Missed his heart by an inch.

    So much for defending a bunch of self-obsessed Tribal shysters.

  8. @xon: I’m not a lawyer. I have no idea what the servicer who bought your second mortgage might have up its sleeve. The firm who sold your second mortgage, though, apparently had their best interests in mind.

    @flipspiceland: I was thinking JFK … a moving target … blew his head right off.

  9. By the way, I’m not “defending” anyone. All I was suggesting was that, there probably was a lot more to the blowup of BSC and LEH than executive compensation arrangements easily made to appear misguided and short-sighted. Besides, many have made the case that, both firms were purposely smothered. In fact, if you believe our Treasury Secretary (I know, these days his credibility is running a wee bit thin), GS needed a bailout, too, otherwise they likewise were at risk of failing (and judging by today’s news that the firm is selling some Asian real estate it just picked up in ’07, one wonders if the firm finds itself, today, strapped for capital). So, my point simply is there are larger systemic issues that in no way have disappeared, and that ought not be clouded by the issue of misguided executive compensation, as though the fact did not exist that, winners and losers in ’08 were chosen by a select few who, themselves, for all intents and purposes are equally at risk of insolvency as were BSC and LEH (including JPM and the U.S. Treasury, I believe).

  10. ToNYC says:

    Bonds a/k/a Mortgage Obligations don’t die until Maturity, unlike Equity instruments.

    For less seasoned observers:
    Franklin National Bank bonds were sold into any bid (the valuable consideration of $1) for any size to quickly establish a tax loss in 1974; not dead yet, bonds became assets of EAB, thence Citicorp which once had its day after being almost dead again in 1991-2 when they couldn’t pay off their callable Citi 12.5 P to P notes (Person to Person/ Credit Card notes), Prince Al-Waleed to the rescue. The Saudi Prince became a genius, then a goat after he met another Prince, Chuck (roast as it were) but do I digress?

    “There are more things in heaven and earth, Horatio,
    Than are dreamt of in your philosophy.”
    Shakespeare, Hamlet, Act 1, Scene 5