Blast from the (recent) past: Bonuses at Wall Street Big Five Surge to $36 Billion
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This article is jam-packed with choice quotes.
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<http://www.bloomberg.com/apps/news?pid=20601103&refer=us&sid=atEk12XYMerk>
November 6, 2006
Bonuses at Wall Street Big Five Surge to $36 Billion
By Christine Harper
Nov. 6 (Bloomberg) -- Never in the history of Wall Street have so many
earned so much in so little time.
Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman
Brothers Holdings Inc. and Bear Stearns Cos. are about to reward their
173,000 employees with $36 billion of bonuses. That's a 30 percent
increase from last year's record, and it doesn't include the billions
more that will be paid by Citigroup Inc., Bank of America Corp. and
JPMorgan Chase & Co., the three largest U.S. banks, as well as the
hundreds of hedge funds and private-equity firms that constitute the
financial industry.
Enriched by the unprecedented value of takeovers, equity trading and
credit derivatives, ``this year will be the best ever for the major
brokerage firms,'' said Brad Hintz, an analyst at New York-based Sanford
C. Bernstein & Co.
The average windfall for each individual at the five largest U.S.
securities firms will be enough to buy a $165,000 Bentley Continental
GT, the two-door coupe favored by Paris Hilton and Cher. They'll have
plenty of change for a box of Romeo y Julieta cigars and a case of Pol
Roger champagne -- the stuff enjoyed by Winston Churchill, Britain's
prime minister in the 1940s and 1950s.
Credit-default swap specialists, who speculate on companies' ability to
repay debt, won't be the only winners this year.
New York City cut the estimate for its budget deficit by 87 percent last
week, in part because of the investment banks' better-than-expected
earnings. The state comptroller's office said Oct. 17 that tax receipts
from the financial industry's wages will rise 14 percent to $2.4 billion
in fiscal 2006.
Ferrari Sales
Dolly Lenz, Manhattan's doyenne of high-end properties, is timing some
of her best listings to coincide with bonus season. Ever since the
1970s, the UJA-Federation of New York has held its annual bankers'
fundraiser on the first Wednesday in December, a date chosen because it
was when Bear Stearns told employees what their bonuses would be.
``When Wall Street does well, we do well,'' said Richard Koppelman,
owner of Greenwich, Connecticut-based Miller Motorcars. Koppelman is
readying a $150,000 red 2005 Ferrari 360 Modena F1 convertible for a
customer who will be getting his first bonus since graduating from
business school two years ago.
London's investment bankers, traders and hedge fund managers will get
8.8 billion pounds ($16.7 billion) in bonuses this year, up 18 percent
from last year, the city's Centre for Economics and Business Research
Ltd. predicts.
`Multiplier Effect'
``We estimate that about 50 percent or more will end up in property,
driving up property markets,'' said Jonathan Said, senior economist at
the CEBR. ``There is also a multiplier effect trickling down to the
construction companies, and people spend more on luxury goods, eating
out and holidays.''
Conditions for money-making worldwide are some of the best ever. The
global economy is in its fourth straight year of growth of more than 4
percent, stock indexes in the U.S., Hong Kong, Canada, Mexico, Spain and
Brazil are at or near records, and corporate-debt defaults are at
historic lows.
Leveraged-buyout firms attracted more than $170 billion of new money
this year, helping to drive $2.9 trillion in takeovers and a surge in
loans, according to data compiled by Bloomberg and London-based Private
Equity Intelligence Ltd. More than $110 billion poured into hedge funds
in the first nine months, beating the last annual peak in 2002 and
fueling demand for stocks, bonds, commodities and derivatives, which are
used to hedge risks and for speculation, and can be linked to specific
events like changes in the weather or interest rates.
Creating Wealth
Securities firms took bigger risks of their own on trading bets and
private investments. Goldman and Merrill reaped gains from stakes in
companies such as Beijing-based Industrial & Commercial Bank of China
Ltd. and Hertz Global Holdings Inc. of Park Ridge, New Jersey.
Combined, Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns
earned $21.3 billion in the first nine months, surpassing the full-year
record of $20.4 billion in 2005.
``There's no industry that's as consistent in creating wealth as broadly
as investment banks,'' said Gary Goldstein, chief executive officer of
New York-based Whitney Group, which specializes in recruiting for
financial-services firms.
Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns are
representative of Wall Street's largesse because they account for more
than two-thirds of its capital, data compiled by the Securities Industry
Association show. They'll report $128 billion of combined revenue this
year, according to the average estimates of analysts surveyed by Thomson
Financial.
Four-Star General
The five firms set aside 40 percent to 50 percent of revenue to pay
compensation and benefits. Each holds back about 60 percent of that
amount for year-end bonuses, said Hintz, who previously was chief
financial officer at Lehman and treasurer at Morgan Stanley. Boutique
banks such as Lazard Ltd. distribute an even larger share of revenue to
employees.
``We'd like to see comp ratios coming down given that earnings are going
to be at record levels, but my expectation is they won't,'' said Mark
Bronzo, who helps manage $700 million, including shares of Goldman and
Lehman, at Gartmore Separate Accounts LLC in Irvington, New York. ``It's
a business that's driven by people who are driven to make a lot of money.''
Goldstein said ``a small number'' of the industry's employees will get
awards of $20 million or more, ``meaning there's an awful lot of people
at the lower end who are going to make $150,000.'' Even so, the average
bonus will exceed the $177,852 the U.S. Army pays a four-star general
with at least 26 years of experience to serve in Iraq or Afghanistan,
including allowances for family separation, hazardous duty and imminent
danger.
Like Peacetime Boom
While public opposition to the Iraqi occupation weighs on tomorrow's
U.S. election, war doesn't cast a pall over Wall Street the way it once did.
In 1940, when Churchill declared, ``Never in the field of human conflict
was so much owed by so many to so few,'' to describe his country's debt
of gratitude to the airmen who fought in the Battle of Britain, the Dow
Jones Industrial Average fell 13 percent. This year, the Dow average is
up 12 percent and it has gained 45 percent since the U.S. and Britain
invaded Iraq in 2003.
``Unless the price of oil gets mixed in here, I think they're just
operating on totally different spheres,'' said Charles Geisst, professor
of economics and finance at Manhattan College in New York's Riverdale
neighborhood and the author of ``100 Years of Wall Street,'' published
by McGraw-Hill in 1999. ``This is the sort of investment-banking market
you expect in a strong peacetime boom.''
Goldman's Bonanza
The biggest bonuses, some exceeding $40 million, will go to traders who
risk the firms' own capital on everything from crude oil to
credit-default swaps, structured-finance specialists who package
undesirable loans into hot-selling bonds and bankers who advise buyout
firms.
Payouts for top performers in London will be up at least 25 percent from
last year, according to Aidan Kennedy, a partner in the
financial-services practice at Christian & Timbers, a recruiter in the city.
Nowhere will the bonanza be bigger than at New York-based Goldman, which
is set to report an industry record of $8.43 billion in profit, up 50
percent from last year.
At Goldman, total pay will average $659,000 per employee, based on
analysts' estimates for $35.7 billion in revenue, the firm's average
compensation ratio of 47.4 percent for the past five years and a payroll
of 25,647 at the end of the third quarter. That includes an average
bonus of about $398,000.
Asian Investments
``You pay what one has to pay in order to attract the best and the
brightest,'' Sanford Weill, the former Citigroup chairman who ran
brokerages and banks for almost four of his five decades in financial
services, said in an Oct. 27 interview. ``Companies have to be
competitive or they're going to lose their good people.''
Goldman's principal-investments unit, led by 48-year-old Richard
Friedman, invests money on behalf of the firm and its employees. It may
be among the biggest beneficiaries of this year's bonuses, said Whitney
Group's Goldstein.
The firm's 5 percent stake in China's Industrial & Commercial Bank has
swelled by $4.5 billion since the country's biggest bank went public
last month -- just six months after Goldman acquired its holding. That
should mean outsized awards for the bankers who oversee investments in
Asia, including 50- year-old Henry Cornell and his Hong Kong-based
colleagues Hsueh Sung and Andrew Wolff, who was made partner this year.
Retention Strategy
Goldman's trading division is another likely winner. It produced $17
billion of revenue in the first three quarters of this year, up 58
percent from $11 billion a year earlier. The division's three co-heads,
Michael Sherwood, 41, who's based in London; J. Michael Evans, 49, in
Hong Kong; and Thomas Montag, 49, notched a 50 percent increase in
revenue from equity trading and 63 percent gain in fixed income.
Montag is moving to New York from Tokyo at the end of the year to become
head of trading in the U.S. He'll succeed Gary Cohn, 46, who became
Goldman's co-president with Jon Winkelried, 47, in June.
``If you're a top trader at Goldman Sachs, and you're not getting paid,
you're going to go start your own firm,'' said Kyle Cerminara, a
financial-services analyst at Baltimore-based T. Rowe Price Group Inc.,
which oversees about $300 billion, including shares of Goldman, Morgan
Stanley, Merrill and Lehman. ``You want them to retain the best people.''
Goldman spokeswoman Andrea Raphael declined to comment.
Surge in M&A
At Zurich-based UBS AG, Europe's biggest bank by assets, Chief Financial
Officer Clive Standish said bonuses will increase more for bankers who
arrange mergers and acquisitions, while fixed-income traders will ``find
themselves flat on the year.'' After three years in the shadow of
trading, M&A, the business with the fattest profit margins in the
industry, is at record levels for the first time since 2000.
UBS's revenue from fixed-income trading rose 16 percent in the first
nine months to 6.45 billion Swiss francs ($5.18 billion). The bank has
arranged $401 billion of takeovers completed this year, up from $226
billion at the same point in 2005, and increased its market share in M&A
to 19 percent from 13 percent.
``Compensation in this business follows revenues and performance,''
Citigroup Chief Financial Officer Sallie Krawcheck said in an interview
last month. ``It's very simple that way.''
Charities Track Bonuses
Still, no one in the industry is suffering. At $36 billion, the bonus
payouts from the five biggest securities firms alone will top the annual
budget of the National Institutes of Health, the U.S. medical-research
agency, and approach the $42.7 billion of funding that the Department of
Homeland Security requested for 2007. The United Nations World Food
Program budgeted about $3.5 billion this year to feed 79 million people
in the world's poorest countries.
Few charities miss the opportunity to remind traders and bankers that
bonus season is a time to give. The UJA-Federation, a Jewish
philanthropy, is holding its annual benefit for about 1,400 guests a
month from now. This year, the organization aims to raise at least $21.9
million, up from last year's record $20.4 million, said Joy Prevor, an
associate executive director in the fundraising division.
``It's really the climax of our campaign because it follows bonuses,''
Prevor said.
At the charity poker game that followed last year's fundraiser, prizes
included lunch with Lloyd Blankfein, 52, who became Goldman's chairman
and CEO this year, and Warren Spector, 49, president and co-chief
operating officer at Bear Stearns.
Widening Gap
While the enormity of this year's bonus pool will further distance Wall
Street from the rest of the economy, it's also widening gaps within the
industry. For managing directors, the highest pay grade at most
securities firms, bonuses used to range from $1.5 million to $2.5
million. Now managing directors are divided by a gulf from $700,000 to
$7 million, Whitney Group's Goldstein said.
``They pay the guys who are investing the firm's capital a lot more than
they pay the people who are acting as agent, generating leads,''
Goldstein said. ``There's always this concern they're going to lose some
of their best people to hedge funds or private-equity firms.''
No matter how big the bonus, the inevitable question is how to spend it.
Lenz, a vice chairman at New York-based realtor Prudential Douglas
Elliman, said she sold a $27.5 million apartment last year to one hedge
fund client who was expecting a $30 million bonus. This year, Lenz has
an $11.9 million apartment on New York's Park Avenue and condominiums in
Soho starting at $3.5 million lined up.
Bonus Table
``Thank God for bonus season,'' Lenz said. ``Last year until the end of
November was kind of lackluster and then that six-week period made the
year better than any year we've had.''
The following table shows the calculations for total and average bonuses
for each of the five biggest U.S. securities firms, based on estimated
revenue, compensation and benefits and number of employees. Figures are
in billions except for percentages and averages:
Firm Goldman Morgan Merrill Lehman Bear
Total Revenue $35.7 $33.6 $32.5 $17.4 $9.0
Comp/Revenue 47.4% 41.8% 49.5% 50.1% 48.8%
Total Comp $16.9 $14.0 $16.1 $8.7 $4.4
Bonus Pool $10.2 $8.4 $9.7 $5.2 $2.6
Employees 25,647 54,349 55,300 24,775 13,000
Average Comp $658,946 $257,594 $291,139 $351,160 $338,462
Average Bonus $397,707 $154,556 $174,683 $210,696 $203,077
(How the figures were calculated: Total revenue: the average estimate of
analysts surveyed by Thomson Financial. Comp/revenue: the average of the
last five annual ratios of compensation and benefits to revenue at each
firm. Total comp: Estimated revenue multiplied by the average ratio of
compensation to revenue. Bonus pool: 60 percent of estimated total comp.
Employees: Total number of full-time employees reported at the end of
the third quarter. Average comp: Estimated comp divided by total number
of employees. Average bonus: Estimated bonus pool divided by total
number of employees.)
To contact the reporter on this story: Christine Harper in New York at
cha...@bloomberg.net.
Last Updated: November 6, 2006 15:12 EST
clams_casino
>Something to think about what it means to "earn" money.
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>
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For the past seven years, it's crossed my mind how the financial group
could rewarded themselves with mega bonuses, even though the market &
overall economy has been relatively stagnant.
Now I'm beginning to understand - it was all with borrowed money.