How bank employees emerged from the crash $12.5bn richer

Stock options granted at the depths of the financial crisis have yielded billions of dollars for employees at some of the biggest US banks, while others saw the promise of massive payouts vanish as shares of their firms languished. Goldman Sachs Group, Wells Fargo & Co and JPMorgan Chase & Co employees reaped about $12.5bn from stock options exercised in the decade since the collapse of Lehman Brothers Holdings, as some bank stocks rebounded smartly. At Morgan Stanley, Bank of America Corp and Citigroup, millions of options were canceled or expired worthless amid fallout from the worst economic disaster since the Great Depression.


“Some benefited and some didn’t – that’s the point of performance-based compensation,” said Fabrizio Ferri, an associate professor of accounting at the University of Miami. “The skeptic will say it wasn’t so much the performance of people, but factors outside their control, and they benefited from being at the right place at the right time.” The collapse subjected banks to intense criticism from lawmakers and millions of Americans who lost homes and jobs. Today, most of those firms are less profitable than they were in the run-up to the 2008 crash, partly as a result of more stringent regulation. Investors scrutinised compensation programmes, blamed for fuelling excessive risk-taking, and pushed boards to rein in pay while tying it more strongly to performance. Still, bank employees in general are doing just fine. While some were forced to adjust their standard of living, financial-services jobs remain among the best-paying in corporate America.

Goldman Sachs Group headquarters in New York. Goldman, Wells Fargo and JPMorgan employees reaped about $12.5bn from stock options exercised in the decade since the collapse of Lehman Brothers Holdings, as some bank stocks rebounded smartly.

Last year’s bonus pool for workers at US banks was the largest since 2007, according to a survey by law firm Linklaters. And some option awards granted during the crisis, meant to persuade workers to ride out the storm, have paid off handsomely in the long run. Such was the case at Goldman Sachs. In December 2008, the bank awarded about 36mn options and 20.6mn restricted shares to persuade top employees and some directors to stick around. The options, with a $78.78 strike price, have generated almost $3bn in pretax gains for workers, according to data compiled from regulatory filings. Shares of Goldman have almost tripled since, closing on Tuesday at $230.21. In total, employees at the bank have reaped $4.9bn from options exercised over the past decade.

Wells Fargo workers realized about $4.4bn in pretax gains on options over the same period, thanks in part to 80.7mn contracts granted in early 2009, when the bank’s shares plunged to a 13-year low. At JPMorgan, whose stock outperformed all of its largest peers since Lehman filed for bankruptcy, employees took home almost $3.2bn from the exercise of options and similar awards.
Among the beneficiaries is chief executive officer Jamie Dimon, who got a 2008 performance award entitling him to as many as 2mn stock appreciation rights – securities that resemble options and typically settle in cash. The performance requirements were deemed to be satisfied in 2014, and Dimon exercised the SARs last year for $112mn, with almost three-quarters of that withheld for taxes.

Those gains aside, almost 190mn options held by JPMorgan workers were cancelled or forfeited over the past decade. Aside from shares withheld for taxes, Dimon hasn’t sold any stock since he joined the firm in 2004. While the three banks haven’t disclosed the number of employees who received options, regulatory filings show that senior executives and board members collected only some of them, indicating that they likely weren’t reserved just for senior management. Representatives for the six banks didn’t provide comments or respond to messages.

Most of them have done away with options and now offer equity awards such as restricted shares that are sometimes linked to performance goals. JPMorgan is the only one of the six that still grants options, having done so as recently as last year. Those who advocate using restricted stock say it makes recipients less prone to take undue risks because the securities will retain value unless the issuer goes bankrupt. Options, which convey the right to buy shares at the preset strike price, are worthless if the stock fails to eclipse that threshold.

Sources and photo-credits: Gulf Times