For $500 million payday, forget Wall St.
By Landon Thomas Jr. The New York Times
THURSDAY, FEBRUARY 2, 2006
NEW YORK: On Wall Street, where the size of an executive's bonus is often the ultimate measure of success, a new status symbol has emerged: the $500 million cash payout.
While the Securities and Exchange Commission is seeking greater disclosure of soaring executive compensation, top executives at hedge funds and private equity funds are collecting much larger amounts beyond the prying eyes of regulators and shareholders.
Two men in particular personify the contrasting personal styles of those with this new type of superwealth. Steven Cohen, a reclusive hedge fund magnate in Greenwich, Connecticut, who made more than $500 million last year, rarely gives interviews and remains rooted to his trading floor.
By contrast, a prominent person in private equity, Stephen Schwarzman, has become more of a public figure. He still cuts the big deals, but finds time for Davos forums and White House dinners. He is estimated to have earned as much as $300 million.
Wall Street did very well last year, reporting record financial results and doling out $21.5 billion in bonuses to thousands of investment bankers, traders and other professionals.
Cohen and Schwarzman lead an exclusive crop of traders and investors who have become multibillionaires by abandoning traditional Wall Street playing fields for the richer - and riskier - pastures of running their own investment firms. And in doing this, they are being paid amounts that most chief executives only dream about.
Unlike the chiefs of publicly held companies, these men run their own private partnerships and are under no obligation to disclose either their returns or their compensation. There are no pesky shareholders or watchdogs to complain about their pay.
Their sole constituency is a small circle of well-heeled investors and institutions that care little about how much their managers are paid as long as the returns - from trading stocks, currency and commodities, or from buyouts and other investments - are there. If the magic touch suddenly disappears, so will these big investors, with their billions in tow.
Indeed, managers like Cohen and Schwarzman are being rewarded for being owners, putting their own interests ahead of their clients and taking a large cut of the profits before their investors are paid.
Cohen, a former trader at a midtier investment firm who started in 1992, takes home 50 percent of his hedge fund's profits; Schwarzman and his team divide 20 percent of the year's gains before returning the rest to their investors.
In effect, Cohen and Schwarzman have reaped outsize profits by institutionalizing Adam Smith's dictum that self-interest, not benevolence, puts bread on their and their clients' groaning tables.
"These big paydays are based on performance," said Andy Kessler, a hedge fund manager and author of books about Wall Street. "For capitalism, it's great these guys are taking a piece of the upside and saying we took the risk so we get the reward."
For Wall Street, such a risk-reward relationship can be intoxicating. Many of the Street's best bankers and traders have left cushy posts at Goldman Sachs and Morgan Stanley to either join established funds or start up their own.
The rapid accumulation of such wealth has been felt in New York's political, society and charity circles. Cohen, 49, a trustee of the Robin Hood Foundation, has established himself as one of the most aggressive buyers on the art scene. Schwarzman, 58, who is a trustee at the New York Public Library and the Frick Collection, was an early and avid financial backer of President George W. Bush.
Schwarzman and Cohen declined to comment for this article.
The lush payday has always been central to Wall Street's lore. The canon of such deals includes the $500 million that Michael Milken got during his best years as a junk bond executive and the $20 million earned by the takeover lawyer Martin Lipton for two weeks' work advising Kraft in 1988. But, as hedge funds and private equity funds have moved from finance's periphery to becoming critical cogs in the Wall Street money-making machine, such levels of pay are becoming the norm rather than the exception.
Strange as it may seem, Cohen's annual payday of half a billion dollars carries less shock today than it did in an earlier era. When Milken's $500 million was disclosed, the public reaction was one of disbelief, and certainty that such a gain must have been ill-gotten.
The performance of Cohen's and Schwarzman's funds has been stellar, especially in light of the U.S. stock market's pedestrian gains.
Cohen, who manages more than $6.5 billion in assets for a wealthy pool of individual investors and institutions at SAC Capital Advisors, produced a return of 16 percent to 19 percent last year, outpacing the 8 percent average of 1,500 hedge funds, as calculated by the MSCI hedge fund index. Last year, when his funds returned 23 percent, he was paid $450 million, according to a yearly compensation review of hedge fund managers by Institutional Investor magazine.
At Blackstone, Schwarzman's $6.5 billion fund returned 70 percent, driven by $3.4 billion in asset sales last year, the best year the buyout firm has had since Schwarzman and his co-founder, Peter Peterson, left Lehman Brothers in 1985 and hung out their own shingle.
As with Cohen, calculating Schwarzman's compensation is an inexact science. Both SAC and Blackstone are closely held partnerships and little is disclosed. But what is known is that Blackstone takes 20 percent of the $3.4 billion, before investors get their share (the Blackstone partners will also share in $1.8 billion from their real estate investments). That $1 billion is then apportioned among the firm's 48 partners. Blackstone does not disclose how ownership breaks down.
Guessing Schwarzman's stake has been a favorite parlor game on Wall Street, and current and former Blackstone employees say it could be as low as 20 percent and as high as 35 percent. Depending on which figure you use, the return to Schwarzman would range from $210 million to $360 million.
What also distinguishes their pay from chief executives of public companies is that it comes mostly in cash. By comparison, Henry Paulson Jr., chief executive of Goldman Sachs, was paid $38 million last year. But only $600,000 of that sum will hit his bank account this year; the rest as Goldman Sachs stock.
People who invest with Cohen say that at the root of his success is an uncanny ability to pick the perfect time to buy and sell a stock.
Google would seem to be a case in point. He rode the stock up, but bailed out as it hit higher, more volatile levels.
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