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PIKs Post Hoc

I suggested in a recent blog that people in the financial supply chain be paid in PIKs, in the illiquid securities they participate in creating, in order to give them the appropriate incentives to price the securities fairly.

Now Credit Suisse is paying its employees bonuses in illiquid securities stuck on their books:

This looks naively like what I intended, but the incentives are totally reversed. It’s too late to price these things fairly; they already exist. Now it’s just a convenient and clever way of getting rid of troubled assets while simultaneously evading perceived limits on pay.

Structured products are often used for regulatory and tax “arbitrage”, and this is another example, except usually the beneficiaries are clients, and here the beneficiary is the structurer. (I suppose you could argue that the beneficiaries are also the stockholders, perhaps). People are infinitely ingenious.

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