Wall Street is bracing for one of its worst bonus years in recent history with compensation levels for bankers and traders falling least 20% from last year, the FOX Business Network has learned.
The biggest problem may be that no one knows exactly how much lower bonuses will fall for 2011. Compensation experts and analysts say a combination of low trading volumes, fewer high-profit banking deals and increased regulatory costs are starting to squeeze profits at big banks such as Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and JPMorgan (NYSE:JPM) with no end in sight.
Goldman, once the mightiest of the big Wall Street firms, may even post a loss for the third quarter, at a time when the firm is drastically reducing costs as well as headcount. Other big firms are experiencing lower profits, and are looking to cut costs.
As a result, bonuses may fall even further at some of the hardest-hit firms.
“One problem is that last year was a decent year, and bonuses this year might even be down as much as 30-40% in comparison,” says Paul Webster, Principal at Michael Page Executive Search, a Wall Street recruitment firm.
Year-end bonuses comprise the majority of the annual compensation for so-called “producers” on Wall Street, such as traders and investment bankers, who snare high-profile M&A deals or know how to capitalize on market swings. In the past, when producers were squeezed on their bonuses, they would simply jump to another firm.
But those days are over, at least for the foreseeable future, as the banking profit drought has resulted in fewer employment opportunities for most rank-and-file Wall Streeters, with only top producers pulling in the big salaries. And given the never ending new regulations faced by banks these days, the job market might not improve anytime soon, at least in the US.
“When these jobs come back, they won’t be here in the U.S.,” says Dick Bove, an analyst at Rochdale Securities. “They’ll be overseas.”
The new regulations have hit firms like Goldman hard by forcing them to eliminate once-lucrative businesses, like proprietary trading. The so-called Volcker Rule, named after former Fed Chairman Paul Volcker, prompted Goldman, Morgan Stanley and other firms not just to eliminate their proprietary trading businesses, but also exit other businesses that regulators deemed too risky.
The laws were a reaction to the 2008 financial collapse, which prompted a massive government bailout of the big banks following the bankruptcy of Lehman Brothers, though many experts have argued that businesses like proprietary trading had very little to do with the banking crisis since the toxic debt accumulated on the balance sheets of the banks and firms was the result of problems in customer-focused businesses, not trading.
In any event, the elimination of such high-profit-margin businesses is not only squeezing bank profits, but government revenues as well. With Wall Street profits down, and bonuses falling, New York City government, which for years feasted off taxes derived from banking profits, will inevitably face leaner times.
“If you don’t make money, you won’t pay taxes,” says Bove. “And that hurts New York.”
Another factor hurting bonuses this year, experts say, is that many Wall Street employees will be entitled to deferred compensation because during the financial crisis many firms delayed payouts in order to keep top talent from leaving. These promised payments are now coming due and will likely shrink this year’s compensation pool even further.
One of the few bright spots in terms of employment and compensation will be in jobs that are needed to comply with the new regulations, such as the Dodd-Frank financial oversight law and the new global regulations known as Basel III. As a result, positions in compliance and audit areas of the big banks are growing, and firms are willing to pay more to fill these jobs, analysts and compliance experts say.
“My compliance team here is having a record year,” Webster said. “The firms are dealing with the SEC, Dodd-Frank and Basel III regulations, making areas in compliance and audit very active.”