Bankrupt Lehman Bros. To Pay Staffers $2.5 Billion in Bonuses; Is Still Hiring Despite Debacle

Barclays Bank, which is acquiring the domestic operations of the bankrupt investment bank Lehman Brothers Holdings Inc., has said it will guarantee the $2.5 billion bonus pool Lehman management created for its American staff, which numbers 10,000. The bonus pool does not cover the employees of Lehman Brothers' foreign operations, such as its 5,000 employees based in London, who aren't even sure if they will be paid. Before announcing that it would file for bankruptcy under U.S. law, Lehman Brothers moved $8 billion in cash out of London.

Despite the recent debacle, Lehman Brothers -- the fourth largest investment bank in the United States when it failed, ranking as the biggest bankruptcy in history -- is still recruiting and hiring employees for its American and Indian operations. The Japanese brokerage Nomura Holdings acquired Lehman Brothers' Asian units in a deal valued at $225 million. The firm's European operations are still in limbo.

Lehman Brothers' American operation is being acquired by Barclays Bank for $1.75 billion, $750 million less than the bonus pool. Barclays Bank has agreed to permit the payout of the bonuses as it is keen to retain key Lehman Brothers, whom it considers the investment bank's greatest assets. Barclays is negotiating new contracts with 30 key employees said to be worth in the nine figures. The value of the acquisition may only be $1.35 billion due to fluctuations in the value of the underlying assets. The bulk of the deal is the $960 million Barclays is paying to acquire Lehman Brother's office tower near Manhattan's Time Square.

The bonus culture of the New York investment banks and financial sector is a target of critics of the free-wheeling, unregulated capitalism that has flourished since at least the Ronald Reagan era. With the advent of a Republican Congress in 1995 and then Republican George W. Bush becoming President in 2001, regulation of the financial sector was pared back until, during the years of the second Bush, Wall St. enjoyed the unfettered excesses of the Roaring Twenties. That era ended with a crash, too. (Ironically, Bush's grandfather Prescott Bush was a principal of Brown Brothers Harriman, a white shoe brokerage. The soul of the old boy is probably spinning in his grave, frustrated at his inability to take a crack at such a market.)

Barclays Bank currently is negotiating employment contracts worth tens of millions of dollars to retain the very same employees who bankrupted the 158-year-old Lehman Brothers Barclays is guaranteeing the firm's bonus pool, which could be worth almost twice as much as the company has been valued as, as the remuneration and bonuses paid to key executives and staff on Wall St. typically are paid whether the employees' strategies or performance were successful or not.

As the federal government's proposed bailout of Wall St. shows, the irresponsible pursuit of high risk investment strategies has not only been handsomely rewarded by the boards of directors of financial institutions, but those rewards will be guaranteed by the American tax payer. Individual American taxpayers are -- along with their children and their offspring on the line for thousands of dollars, individually. In the short-term, Americans will pay for this debacle with higher inflation, lower credit, and a stagnating economy. Japan, which went through a similar collapse of its huge banks over a decade ago (an example ignored by Congress in its lust for deregulation) went into an actual economic depression for six years.

The United States has adopted a culture where profits are to be kept firmly in the private sector while losses are to be borne by the public sector. This is a sobering thought, realizing that the next great market being engineered by Wall St. are infrastructure funds, in which state and local governments will cede ownership over assets such as roads and bridges that will be built on a for-profit basis by the private sector.

Sources:

The Economic Times, "'Bankrupt' Lehman Brothers on hiring spree!"

The Independent, "Fury at $2.5bn bonus for Lehman's New York staff"