It's sort-of-good-news day at BofA, with Dick Bové declaring that if he were hypothetically buying bank stocks he'd hypothetically load up on BAC. In that tradition, footnoted.com has a nice note pointing out that, with the stock down 20% yesterday, Brian Moynihan looks less like a shareholder and more like a bondholder. Which at this point is - yeah, sort of good.
As they explain:
That’s not because Moynihan has been selling a significant number of shares — he still owns 481,806 shares, up 7% from a year ago, plus heaps of options and restricted shares that he may get title to eventually. Even at today’s depressed prices, the shares he actually owns are worth something like $3.4 million.
But BofA also owes Moynihan a bundle, in the form of pension and deferred-compensation promises. Unlike retirement benefits for the rank-and-file, executive benefits typically don’t actually reflect cash set aside in a dedicated pension fund or 401(k) account. Rather, they’re nothing more than IOUs — in Moynihan’s case, IOUs worth some $10.7 million as of March 16, according to BofA’s latest proxy, and probably at least a little more by now.
Compare the structure of Moynihan’s claims to his firm’s capital structure. In BAC’s last 10-Q, liabilities were a little over $2 trillion, of which about $1 trillion was deposits and $426bn was classed as long-term debt. Equity market cap was around $66bn yesterday, making it worth call it 13% of the long-term unsecured capital structure (long-term debt plus equity).* Moynihan’s mix of $10.7mm debt / $3.4mm equity (an understatement of the equity as he has some restricted shares not counted in Footnoted’s math), meaning he was about 24% in equity.
There’s been all sorts of complaining about how financial industry workers have asymmetric risk and reward. To pick one at random, from the FT last month:
Too often, pay plans encouraged the big bet – where the pay-off to executives on the upside was huge, while the downside was limited or non-existent. Managers were handsomely paid for transactions that produced upfront fees, but later resulted in huge credit losses. In 2010, the Securities and Exchange Commission chairman Mary Schapiro and Federal Deposit Insurance Corporation chairman Sheila Bair testified before the Financial Crisis Inquiry Commission that asymmetric pay packages were a significant factor in the financial crisis.
“Asymmetric pay packages” means you get rewarded for good results but lose nothing from bad ones. Giving managers lots of restricted equity in their companies (as opposed to just big cash bonuses) creates some symmetry (if they screw up, their stock goes down). But in some cases that can be bad: if things get really rough and equity value gets near zero, a shareholder-manager will prefer to take big risks even if it has the chance of wiping out the company entirely, because the shareholder’s upside is unlimited and further losses fall mostly on creditors. That’s why legal principles suggest – with lots of ambiguity – that officers of a solvent corporation should try to maximize shareholder returns, while officers of an insolvent one (or one in the “zone of insolvency”) should try to preserve assets for creditors.
After yesterday's drop Moynihan’s comp package, probably more or less accidentally, seems pretty tailored to create those incentives – when things are good (or less bad) his shares give him option value, when they’re bad at least he’s got his pension to encourage him to do things that creditors will like even if shareholders don’t (raise capital anyone?). As BAC CDS neared inversion yesterday, BAC bondholders might be glad that Moynihan has a lot more skin in the game as an unsecured creditor than he does as a shareholder.
Or that's the theory. Of course, it didn’t exactly work for Dick Fuld.
* I’m being pretty arbitrary in assuming that “long-term debt” is the thing that is functionally pari passu with Moynihan’s (unsecured, long-dated) pension obligations, but it’s not unreasonable. Deposits are FDIC insured. Lots of trading/derivative/repo liabilities are short-term and secured. CP is unsecured but a lot safer by way of being shorter dated.