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Wall Street Gets Its Groove Back

Susanne Craig|The New York Times
Thursday, 4 Nov 2010 | 10:20 AM ET

These are not boom times for financial firms. Trading is down and new regulations threaten to take a bite out of future profits. Some firms have been handing out pink slips. Morgan Stanley even posted a loss in its last quarter.

NYSE traders
NYSE traders

Yet Wall Street pay seems to defy gravity: Bonuses will be up this year, according to a study to be released on Thursday by a Wall Street compensation expert, Alan Johnson. The survey shows that overall compensation in financial services will rise 5 percent this year, with employees in some businesses like asset management getting increases of 15 percent.

“I did not expect compensation would come back the way it has,” Mr. Johnson said. “I underestimated the industry’s resiliency.”

One does not have to look far to see that Wall Street has found its stride again. Hot new restaurants are opening, and they are packed with traders and investment bankers. John DeLucie, the chef and one of the owners of The Lion restaurant, one of Greenwich Village’s newest hot spots, said business had been surprisingly strong since it opened in May.

Customers are buying vintage bottles of wine; the restaurant recently sold a 1982 Château Mouton Rothschild for $3,950. “We are seeing a lot of luxury purchases, like vintage Bordeaux, things that we haven’t seen sell well in a few years,” Mr. DeLucie said.

Rich year-end bonuses are expected this year even though the total amount of money set aside for compensation in sales and trading and investment banking for the five big Wall Street banks has shrunk.

Over all, Goldman Sachs, Morgan Stanley , Citigroup, Bank of America and JPMorgan Chase have set aside $89.54 billion this year to pay employees, 2.8 percent less than a year ago, according to data from the Japanese bank Nomura. Total revenue for the five firms has fallen about 4 percent this year.

But in the wider universe of financial companies, including asset managers and smaller firms, compensation will be modestly higher, Mr. Johnson says.

In compiling his survey, Mr. Johnson says he talks to executives across Wall Street, looks at what has been set aside to date for compensation and then makes estimates based on which divisions are doing well and which are not.

Financial firms will not calculate what exactly will be paid until January. So much depends on what happens in the fourth quarter, Mr. Johnson cautions. If business continues to be sluggish, bonuses may drop from last year.

While the current market may not necessarily justify a bump up in bonuses, Wall Street bankers and traders benefit from a curious economy of their own making. If Wall Street firms start lowering pay, employees will most likely find another firm willing to pay them more. As a result, even in difficult years, Wall Street still doles out big bonuses, typically cutting into what otherwise would go to shareholders.

And this year, while some firms including Bank of America and Credit Suisse have let go of some employees as trading activity has slumped, other firms are hiring, putting upward pressure on 2010 compensation.

For instance, Nomura recently started an aggressive expansion on Wall Street and is paying high prices for many of its new recruits. Morgan Stanley, struggling to find its footing since the 2008 credit crisis, has hired hundreds of traders this year. And despite its third-quarter loss, Morgan Stanley plans to add more staff by year’s end. Citigroup, badly bruised by the mortgage crisis, has also shown a willingness to pay millions of dollars for some strategic hires.

“This is the first year we have seen people building again,” Mr. Johnson said. “This build is medium sized, not big, but we are coming from nothing, so this is actually a big deal.”

The line item likely to garner the most attention this year is executive pay, the bonuses that go to top executives like Lloyd C. Blankfein of Goldman Sachs and Jamie Dimon of JPMorgan Chase. Pay for the most senior executives across Wall Street fell during the credit crisis. Still, President Obama called the bonuses paid during the crisis “shameful.”

But chief executives should see a “meaningful” increase this year, Mr. Johnson said.

“Senior executive pay will go up more than the rest,” he said. “I think executives are saying ‘I didn’t get paid much for two years and now I want something.’”

In 2009, Mr. Blankfein, who runs Wall Street’s most profitable firm, received a $9 million all-stock bonus. In 2008, the year the financial system nearly collapsed, he took no bonus. In 2007, he took $68.5 million in cash and stock, a record payday for a Wall Street chief.

Lower down the food chain, Wall Street employees tend to get a base salary of $100,000 to $200,000; the rest comes in big year-end bonuses. Firms typically pay out 40 percent to 50 percent of their revenue in compensation and benefits. Top employees often make well in excess of $10 million a year.

Mr. Johnson said asset management employees, hard hit last year, could see their compensation rise as much as 15 percent in 2010.

However, fixed-income and equity traders will not fare quite as well, he said, predicting the difficult trading environment recently could result in a 40 percent compensation cut for some employees. This, of course, is off a high base in 2009, when these divisions did quite well.

Executives in private equity and those who handle mergers and acquisitions will see their pay rise slightly, as much as 5 percent, Mr. Johnson said. Those who work in retail banking will see a slightly larger bump, between 5 and 10 percent. The big losers, he says, will be traders in fixed income and equities, with only some groups, like commodities traders, doing better.

Lucy Cabrera, president and chief executive of the Food Bank for New York City, said she expected it to take two years for the new wealth from Wall Street to trickle down to Main Street. She said 93 percent of the agencies the food bank services have seen an increase in first-time users, one sign that those hurt by the 2008 crisis have only just run out of money. “Let’s hope this news means increased spending and jobs for others,” she said.

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