Credit Suisse Twists the Claw

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You made the bed... now go sleep in it! That's Credit Suisse's message to its directors and managing directors, who will receive much of their deferred compensation this year not in company shares but in a blend of hard-to-sell leveraged loans and commercial mortgage-backed securities.

The Swiss-based institution also introduced a bonus clawback plan, joining UBS and Morgan Stanley. Unlike those two, Credit Suisse reportedly will claw back past bonuses not only in cases of wrongdoing or future losses, but simply for the sin of leaving its employ within two years after a bonus.

The bank, which didn't get a government bailout but is nonetheless struggling with losses and a weakened balance sheet, is creating a fund called the Partner Asset Facility, or PAF. Similar to a "bad bank," the PAF will take on about $5 billion of illiquid assets. Bloomberg News reports that the facility will remain on Credit Suisse's balance sheet and will be held in the fund management division. But because employees' PAF units will bear the first risk of loss, Credit Suisse expects that its own capital will be insulated from market-value fluctuations of the PAF, Bloomberg says.

Units to Be Sizable Portion of Year-End Bonus

Shares in the PAF reportedly will be distributed to Credit Suisse managers and managing directors and will make up a sizable portion of their year-end bonus. Credit Suisse has not made any official announcement.

Breakingviews.com reports that the PAF assets are currently on the books at 65 cents on the dollar. Without explaining how, Breakingviews estimates that PAF units would appreciate 180 percent if those assets recover to 80 cents on the dollar, and would soar 440 percent if the underlying assets pay off at par.

The bank itself will lend to the facility, and will also allow outside investors to purchase units. Units held by employees will receive coupon payments at an annual rate of 250 basis points over Libor. The fund eventually will distribute more cash to unit holders as assets mature or are sold. But such payments won't start for "several years," according to a memo from Brady Dougan and Paul Calello, chief executives of Credit Suisse and its investment bank division, respectively.

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