Bailout

Turning stock bonuses into cash

By Felix Salmon

It probably comes as no surprise to learn that bankers have discovered a loophole allowing them to turn their restricted stock into cash. The trick is to notice that restricted stock can still be vested stock — which means that although it can’t be sold, it is owned by the employee in question and can therefore be pledged as collateral against some kind of equity derivative.

Liam Vaughan’s article is vague on the specifics, talking only about “strategies such as call options, put options, and collars” which allow bankers to cash out at “a discount of up to 50%”; I’d be interested to know exactly how this works. The obvious thing to do is just sell the stock forward on the date it stops being restricted, but maybe that’s not allowed or there’s a smarter way to do the same thing using options.

Does anybody have any details on what’s going on here, and how widespread this practice is? And does this tactic defeat the purpose of paying bankers in stock, or is the 50% discount punishment enough?

Full post as published by Macroprudential on February 02, 2010 (boomark / email).