U.S. Markets closed

How Bank Workers Emerged From the Crash $12.5 Billion Richer

Anders Melin
 

Stock options granted at the depths of the financial crisis have yielded billions of dollars for employees at some of the biggest U.S. banks, while others saw the promise of massive payouts vanish as shares of their firms languished.

Goldman Sachs Group Inc., Wells Fargo & Co. and JPMorgan Chase & Co. employees reaped about $12.5 billion from stock options exercised in the decade since the collapse of Lehman Brothers Holdings Inc., as some bank stocks rebounded smartly.

More from Bloomberg.com: Apple Plans Another Death Blow to the Phone Carriers

At Morgan Stanley, Bank of America Corp. and Citigroup Inc., 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.”

See also: Can we survive the next financial crisis?

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 scrutinized compensation programs, blamed for fueling excessive risk-taking, and pushed boards to rein in pay while tying it more strongly to performance.

More from Bloomberg.com: Florence Gets Bigger as It Heads Toward North Carolina Coast

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. Last year’s bonus pool for workers at U.S. 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 36 million options and 20.6 million restricted shares to persuade top employees and some directors to stick around. The options, with a $78.78 strike price, have generated almost $3 billion in pretax gains for workers, according to data compiled from regulatory filings. Shares of Goldman have almost tripled since, closing Tuesday at $230.21.

More from Bloomberg.com: Super Typhoon Intensifies in Pacific and Heads Toward Hong Kong

In total, employees at the bank have reaped $4.9 billion from options exercised over the past decade.

Wells Fargo workers realized about $4.4 billion in pretax gains on options over the same period, thanks in part to 80.7 million 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 $3.2 billion 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 2 million 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 $112 million, with almost three-quarters of that withheld for taxes.

Those gains aside, almost 190 million options held by JPMorgan workers were canceled 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.

Conversely, options granted when a company’s stock is depressed could yield a fortune commensurate with the strength of the subsequent rebound.

Trailing Peers

Not everyone was that fortunate. Shares of BofA, Morgan Stanley and Citigroup so far have failed to join their largest peers in piercing their pre-crisis records.

As a result, at least 320 million options issued to BofA employees were canceled of expired out of the money over the past decade. The same goes for about 100 million options granted to Morgan Stanley workers and 24 million at Citigroup, adjusted for a 2011 reverse stock split.

Some Citigroup and Morgan Stanley options issued since the crisis did pay off, generating pretax gains of $345 million and $45 million, respectively.

While that’s a relative pittance compared to the payouts at other banks, it stands in stark contrast to the millions of Americans who lost jobs, retirement savings, homes and trust in the financial system.

For people whose financials were derailed, rebuilding that confidence is a slow process, Warren Buffett, who made more than $3 billion on an investment in Goldman Sachs following Lehman’s collapse, told the Wall Street Journal.

“The people who ran most of the institutions, the big institutions that got in trouble, I probably shouldn’t name names but, you know, they went away rich,” said Buffett, the billionaire chairman of Berkshire Hathaway Inc. “They may have been disgraced, but they went away rich.”

Updates with 2017 bonus data in sixth paragraph.

More from Bloomberg.com

Read How Bank Workers Emerged From the Crash $12.5 Billion Richer on bloomberg.com