Since the presidential election in November, the financial sector has ridden a fantastic rally to heights that only a few short months ago seemed improbable. Some of the biggest banks in the U.S. have seen their share prices rise by 20% to 30% in less than a quarter. Now, the executives running these TBTF banks are reaping huge benefits—and they should apparently be thanking President Donald Trump.
A number of news outlets are reporting that C-suite members at a small handful of the country's megabanks have collectively raked in over $100 million from stock options to sell hundreds of thousands of their own shares the past three months.
The executive pay structure on Wall St commonly rewards people who run the biggest firms with company stock as part of their bonuses. Oftentimes, they are rewarded with "preferred" stock, if the firm issues such shares, or with options that only pay off if share prices reach specific levels. So there's nothing particularly revelatory about big payouts to bank executives.
However, the timing and unlikely nature of this frenzy of stock options ought to receive some close scrutiny.
In just the case of Goldman Sachs (GS), the company's executives became eligible to purchase a half-billion dollars worth of GS shares (between them) following the post-election rally.
The way the options are structured, if the share price hit a predetermined incentive threshold in the given time frame, the executives were allowed to buy the shares below market value, securing them a tidy profit when they sell. The catch is that these options were soon to expire, and would've been rendered worthless had Goldman stock not risen some 33% since November's election. Since Trump's victory, the company's executives have netted $25 million (after fees) by selling their shares. Presumably, they are still holding onto much more of that stock.
Lloyd Blankfein, the Goldman Sachs CEO, was holding thousands of ten-year stock options (from 2006, when he first took over as chief executive) that would have expired without paying out unless the GS share price jumped at least 12.5% (to $200 per share) in the span of a few weeks. Under normal circumstances, this would likely have been dismissed as far-fetched. Trump wins and Blankfein's options become winners all the same.
Similarly, Morgan Stanley (MS) CEO James Gorman was able to cash in stock options he bought five years ago that could only be exercised in the event that the company's shares rose above $41, double their 2011 levels. (Prior to the election, hitting this key mark likewise seemed virtually out of reach.) The MS share price subsequently rallied over 30%. Gorman made more than $8 million from selling his shares; granted, it was the first time he's sold any company stock in his six years at the helm, and he's still required to hold 75% of these bonus shares while serving as CEO. (His current stockpile—pun intended—is still worth $56 million, by the way.)
Timing Is Everything
As doubtful as these developments seemed before they came to fruition, the story is precisely the same elsewhere around TBTF Land. JPMorgan execs sold over $20 million of their shares following the election bump for the sector. Moreover, these payout numbers are only representative of the highest-level executives across the industry who must, by law, report when they sell shares. Many other employees at these firms who aren't required to make such disclosures have also surely been cashing in slightly more modest fortunes.
One imagines that John Q. Public is just as enthusiastic, relieved, and grateful as Blankfein, Gorman, and others that so many stock options were triggered (thanks to a wholly unforeseen rally) just when it seemed they would expire as duds. The equally surprising election outcome, even when paired with President Trump's pro-business agenda for tax and regulatory reform, would seem to be the only cause for the spurt of unprecedented market exuberance that made all of those bets pay off at the last minute. According to the Wall Street Journal, this $100-million surge of shares being cashed in over such a short period of time is unmatched in the last decade.
We have come to accept the incentive structure for Wall St executives as a justified way to tether corporate leaders' compensation to the company's success. Unfortunately, it also potentially encourages profit-seeking behavior that narrowly focuses on the short term. Especially so soon after the news is disclosed, it's unclear whether or not these stock options were pushed "into the money" (i.e. became worth their respective strike prices) by short-sighted or self-serving corporate behavior.
If at some point this is what indeed comes to light, perhaps years down the road, I'm sure the American people would hardly be able to suppress their shock.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.