The Wall Street Journal-20080129-Deal Journal - Breaking Insight From WSJ-com

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Deal Journal / Breaking Insight From WSJ.com

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Meet Chris Flowers,

Financial Jedi Master

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Firm Manages to Walk Away

From Failed Sallie Mae Deal

And Avoid $900 Million Fee

Financier J. Christopher Flowers has walked away from the now-failed buyout of Sallie Mae without a scratch -- or a breakup fee -- in a deal that may finally clean up the shards of the biggest and messiest breakup in history.

In the wake of yesterday's news, investors must have asked themselves: Why would J.P. Morgan Chase and Bank of America underwrite a new $31 billion line of credit for SLM, commonly known as Sallie Mae, when the two banks already were on the hook for a $26 billion line of credit the struggling student-lender could barely refinance?

What makes the difference, apparently, is who you can persuade to go in on the bet with you. In the old financing, the two each held roughly half the risk. For the new, bigger financing, they have distributed the risk among a syndicate of international banks all eager to get a bigger foothold in the U.S. loan market, including Barclays, Deutsche Bank, Credit Suisse Group, Royal Bank of Scotland and UBS.

Who wins in this equation? It looks like every side gets a little something, starting with the savings on legal fees related to Sallie Mae's Oct. 8 lawsuit against Flowers and the banks over the $900 million breakup fee.

The student lender doesn't have to press what was surely a quixotic lawsuit against Flowers, who claimed the student lender's deteriorating financial condition violated the material adverse change clause.

Sallie Mae gets badly needed financing, which should forestall any high-ranking officials cursing on its conference calls for a while.

And Chris Flowers? Absent a terribly timed deal on the student lender, he comes out looking like one of the smartest people in finance.

-- Heidi Moore

Banker Bonuses:

'Flat' Is New 'Down'

The Notorious B.I.G. once rapped, "Mo Money Mo Problems," but it turns out that less money causes just as many.

Much to the despair of many top bankers -- we are talking about the folks being paid more than $2 million a year -- many top firms are cutting the cash portion of their bonuses to redistribute the cold, hard benjamins to those lower down on the pay roster.

Banks including Merrill Lynch, Citigroup, J.P. Morgan Chase and UBS have cut how much cash their highest-paid bankers earn and have replaced it with stock vesting over several years, which pushes the big-time paydays to a time when the banks should be flusher.

Citigroup is replacing as much as 20% of the bonus package of its highest-paid managing directors with a new restricted stock type vesting over two years. This to make up for the fact that those officials will get less cash. (The cash portion of the bonus may be cut 50% in the case of the highest-paid executives, according to a person familiar with the situation.)

The new restricted stock vesting period is shorter than the usual stock distributed through its capital accumulation plan, which vests over four years.

Meantime, J.P. Morgan increased by 5% the amount of stock in the pay packages of managing directors earning more than $1 million. Bankers earning more than $2 million will receive 10% more of their pay in stock this year.

All this has led to a little gallows humor around Wall Street. We all know the equivocation that "flat is the new up," indicating that flat pay is just as good as a bit of a rise.

But with flat pay and less cash coming his way, one banker sighed, "Flat is the new down."

-- H.M.