September 21, 2008
Fury at $2.5bn Lehman bonus
Nomura and Barclays table bids today for US giant’s London operation as bank’s administrator likens collapse to Enron
John Waples and Danny Fortson
STAFF at Lehman’s New York office who helped to cause the world’s biggest corporate bankruptcy are to share in a $2.5 billion bonanza.
The bonus, which has been described by London staff as a “scandal” has been pledged by Barclays Capital, the British-based bank that last week acquired Lehman’s American operation and took on 10,000 staff.
The $2.5 billion (£1.4 billion) pot, which has been ring-fenced as part of the acquisition, has caused huge resentment among the 5,000 staff in the firm’s European and Middle Eastern operations who are not guaranteed to be paid after this month. There are, however, hopes that half the jobs in Lehman’s Canary Wharf office could be saved today by either Barclays or Nomura. Bids are being submitted for its UK equities and investment-banking business.
A Chapter 11 bankruptcy document filed by Lehman Brothers Holdings Inc says that Barclays has identified eight individuals out of the New York staff of 10,000 who are vital to make the deal succeed and a further 200 who are identified as “key”. It is thought that these eight directors will be locked into two-year contracts worth between $10m and $25m a year.
The $2.5 billion had been accrued as part of the contribution to Lehman’s group profits for the first nine months of the year. Barclays said there is no obligation to pay it out but analysts say the competitive pressure to keep key staff means he will have to. Bob Diamond, president of Barclays Capital, said: “You can expect us to manage this with the same discipline and performance terms that we have at BarCap”.
The biggest bonuses are likely to be for Michael Gelband, the bank's global head of capital markets, and Eric Felder and Hyung Soon Lee, global co-heads of fixed income.
Barclays has asked all 10,000 employees to attend work tomorrow at the bank’s Manhattan headquarters. Over the next three months
it will decide how many to keep and will use some of the bonus to meet remuneration packages. It is thought several thousand could be made redundant.
One London-based Lehman employee said: “It’s an absolute scandal. I will never work for an American firm again. It looks like they are prepared to cut you off at the knees. Nobody from America has been in touch since we went into administration on Monday.”
Another said: “Every other financial institution has been saved, including Lehman Brothers in the US, but it’s another story for the employees in Europe.”
Lehman has attempted to demonstrate in recent years that it is a global united company. Its mission statement says: “We are one firm.”
Price Waterhouse Coopers (PWC), the administrator to Lehman’s European operation has demanded that the firm repay £4.4 billion that was transferred from the UK to Lehman’s US holding company just hours before the firm collapsed. This left London with no money to pay staff.
If PWC is successful, the European operation would be Lehman’s third-biggest creditor after Citigroup and Bank of New York. It is thought that PWC will want to look closely at how $2.5 billion had been ring-fenced as part of the deal with Barclays. It will want to know who negotiated the sale and the precise details surrounding who benefited.
Lehman’s American office was in a frantic scramble for cash as rival banks refused to provide capital in the inter-bank lending market and those that had given loans wanted them to be repaid immediately.
The administrator is looking closely at how this cash was transferred. It was an unusally high transfer that raised eyebrows in the London office.
Yesterday Gordon Brown, the prime minister stepped into support PWC’s claim demanding the American division return the £4.4 billion.
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PWC has a team of more than 200 accountants and 100 lawyers working round the clock at Lehman’s headquarters at Canary Wharf. Tony Lomas, who is heading the team and who also handled the administration of Enron in Britain said that Lehman was “as close to a mirror image as you could get” to that case.
He added: “Both in terms of the impact of the loss of confidence and the complexity of the trading transactions, the interdependencies of the group companies, and the sweeping of cash into a holding company account, leaving subsidiary companies empty of cash at the point of collapse.”
He predicted that winding down the business will take years. “There are still Enron companies that our team is handling, and that was seven years ago. This is more complex.”
PWC is today examining bids for parts of the London office. Barclays is attempting to cherry pick Lehman’s equities and investment-banking team, which totals nearly 2,500 people. Nomura, the Japanese bank, is the rival bidder and is prepared to buy the whole business. Such a deal would give it a much greater presence in London.
Senior directors at the Canary Wharf office are trying to ensure that secretaries and IT staff get jobs. And they are keen for the buyer to make good the deficit in Lehman’s UK pension fund.
There is also huge concern among counter-parties who have been exposed to transactions with Lehman. Many have been forced to write these down to 10 cents in the dollar.
The way that Lehman has set aside cash to reward staff has angered politicans. John McFall, chairman of the Treasury select committee, said: “This is socialism for the fat cats. Everyone in financial services recognised that the remuneration system is the cancer on the financial body politic here. Until that is tackled we can’t move on.”
Vince Cable, Liberal Democrat shadow chancellor, said: “This is outrageous and deeply cynical. Part of the problem with Lehman and the other weak investment banks was that they were driven by the bonus culture, which rewarded big deals rather than good deals. It was what destabilised the institutions in the first place. They are being rewarded for having adopted business behaviour that has wrecked their bank.”
John Varley, Barclays chief executive, said: “If you look at the balance sheet that we have acquired, we have acquired net assets of about $4 billion for $250m. And included in the growth assets for these liabilities, which are netted to get to the $4 billion, is the assumption of a bonus pool for Lehman.”