Wall Street Bonus Update
A: Would love some reader participation here, especially if you are in financial industry and need to post comment anonymously. Most of my contacts I have surveyed STILL expect to get paid their full bonuses come early 2008; in fact 90% of the friends / clients / colleagues I talked to about this said they expect a satisfying bonus season. But I wonder if it will turn out this way. Manhattan real estate is seasonal and it's normally the JAN-APRIL bonus season that turns out to be the most active time of year for sales volume, inventory declines, and bidding wars. What will happen this year given the carnage in the financial sector?
This is going to be the first big test for Manhattan real estate. I'm somewhat relieved to hear the positive words from those I keep in touch with about these topics, but I have to wonder whether these people are a good representation of the whole industry? I'm not so sure; given the generally positive nature of the self. It's very hard for me to imagine a bonus season where everyone gets their expected bonus. The write-downs in the brokerage and banking world have been in the tens of billions so far, and with some 8 weeks or so left in the year, and the Nov. 15th accounting change, it's all but guaranteed that more write-downs of losses will come. It's still too early too tell how the bonus season will be, with such uncertainty in this sector.
With Bill Gross of Pimco declaring this credit crisis as a "$1 Trillion Problem", and predicting "$250 billion of subprime and Alt-A mortgage loans to default and those defaults will fall to the balance sheets of investment stalwarts such as Merrill Lynch and Citigroup", it's hard to ignore the side effects to bonus pool. That would mean we have some $200+ Billion of losses yet to be reported.
My sentiment for a great bonus season has certainly declined in the past 3-4 weeks. No question about it. When I was interviewed for the OpenHouseNY segment, back in mid September, we didn't know how bad the credit crunch was getting. Needless to say, the credit environment has deteriorated significantly in the 5-7 weeks after that taping. I'd be a fool to stick to what I said in the past when the environment has changed so drastically.
As I reported a few times over the past 3 months or so, buyer confidence has dipped and sales volume seemed to have slowed. This combination helped to build inventory slightly from the month of August to September, as noted by Jonathan Miller's reporting. While the changes are small and not enough to base any trends on, they are worth noting given the change in buyer confidence.
I expect bonuses to come in, but not as widespread (in total bonuses handed out) and not as high (in size of bonus) as some may expect with stocks just off record highs. The financial sector has felt a lot of pain, and management knows the level of toxic waste still on their books. I would go far as to say that 2009's bonus season looks to be the real problem, not this years, as we still have some time to get the full depth of losses off the books.
For Manhattan inventory trends, this bonus season will be especially important! We must monitor the sales pace during these normally frenzy months to see if the deals come through as expected, or not. If they don't, and volume is light, we will have much more inventory heading into next summer than we did in previous years.
FINANCIAL SECTOR WORKERS ---> What is your feeling about your upcoming bonus?
Posted by anonymous
Tue Nov 6th, 2007 10:22 AM
The people who are about to be fired or expect low bonuses aren't posting. Some people will be just fine - they have always lived conservatively, banked most of their bonuses and are probably not going to affect the market in any way. Some people aren't going to be fine - the question is whether they will start liquidating their real estate. I don't personally know anyone in that position because the people I know are conservative financially and either never bought or have bought something way below their means. So basically, holding pattern for these folks. The folks who, IMO, have fuelled the RE market aren't going to be a factor this coming year - not because they aren't going to get paid well but because they will want to conserve their bonuses and see what happens in '09.
Posted by anon
Tue Nov 6th, 2007 10:33 AM
i work with a bond trader and the talk around here is that none of us will get bonuses near what we had hoped. we expect that though so my expectation is lower already. i already own and i don't intend to sell so for me it doesn't really matter
Posted by anonymous
Tue Nov 6th, 2007 10:41 AM
We expect to get decent bonuses but the main talk is about the global economy/new directions. Two of our top portfolio managers are slated to go to london - which is supposedly where the hedge fund action/future is at. The basic feeling, at my desk, is that nyc is played out and the real money is elsewhere.
So, yes, i do think we'll ger bonuses. But not sure NYC is where they will be spent.
Posted by Noah
Tue Nov 6th, 2007 10:53 AM
great stuff.. keep it coming people!! Would love to hear more on this topic.
Thanks above for sharing!!
ANON - 10:41 - interesting. is it another asset class that you think the money will be spent? Or housing elsewhere outside Manhattan?
Posted by Doug Heddings
Tue Nov 6th, 2007 11:34 AM
My friends, family, clients are all sharing that they expect bonuses to be significantly less (20-30%) than last year but all remind me that last year was a record year. I also know at least one person who's hedge fund went under and a few others who have shared some big layoff news within their firms. Another friend is on the management team that allocates bonus money at a large bank and he said they aren't reporting nearly as early this year because the news isn't good.
Last year at this time, my head was spinning because I was so busy. Many had already been told what they would get and they started shopping way before bonuses were paid. I still think a lot of people are going to make a lot of money (GS folks should do well) but it remains to be seen how they will spend it this winter.
Posted by Cons
Tue Nov 6th, 2007 12:09 PM
I'm in a large asset management firm and have heard that bonuses will be lower mainly driven by poor hedge fund returns.
A big part of management fees for hedge funds is the performance fee that's charged. The turmoil this summer caused hedge fund returns to be lowered. Even the HFR indices indicate returns that are lower accross every hedge fund strategy
Posted by Anon
Tue Nov 6th, 2007 12:39 PM
I work at a large bank selling credit derivatives and the exciting synthetic CDO asset class. Bonuses this year will be WELL down. Not just here, but everywhere. Lots and lots of job cuts still to be made too.... things get a lot worse before they get better.
Posted by Anonymous Banker
Tue Nov 6th, 2007 01:21 PM
I work in the Investment Banking. Looking at the Q3 financial results of the major firms there are some very differing trends. This year will be one of very different numbers between different firms.
Year to Date, Morgan Stanley and Goldman Sachs are still looking at higher comp per capita than last year. (Let's not forget that Goldmans numbers last year were huge too).
Now look at Citi, Merrill Lynch and UBS. These firms are looking terrible. If you work here you may be asked to get your own check book out to write your own bonus.
If you are a junior Investment Banker you will still get an uptick year over year maybe just not the 50-100% increase you'd have come to expect in recent years.
If you in a hedge fund. It's simple arithmetic and as Doug said, some firms aren't doing well, but others are. On average 6 or 7% year to date isn't stunning.
If you in a more traditional mutual fund house, it's still not been too bad this year. The S&P and global indeces are doing absolutely fine.
Overall the numbers issued by the NYS comptroller of -15% on average are probably not too far off. However, if the second shoe is really dropping these credit issues then -15% may turn in to -20% or 25% by the time we're all said and done.
All said and done, it's all enough to get me to sit on the fence and wait it out before investing in real estate right now.
Posted by Noah
Tue Nov 6th, 2007 01:25 PM
great feedback. Thanks anon's above & Doug
Posted by annon
Tue Nov 6th, 2007 02:43 PM
The bulls are bullish and the bears are bearish about bonuses. The actual will be somewhat in between. That being said, the bears are smiling more than the bulls at the moment.
Posted by Colgin
Tue Nov 6th, 2007 05:05 PM
Good stuff everyone. Please keep Wall Street bonuses gossip/predictions coming!
Posted by Anonymous
Tue Nov 6th, 2007 08:34 PM
Unfortunately, I work for a firm that was hit very hard with the mortgage write-downs and people I'm speaking with are prepping for a lower bonus. Since no one seems to know the exact extent of the loss, mgmt will probably try to keep something in reserves (which means less bonus) to cover any unforseen additional write-downs.
Posted by Noah
Tue Nov 6th, 2007 08:42 PM
I just want to thank ALL for anonymously posting and sharing their thoughts on this topic. This is what its all about.
New Media Baby! Keep it up, and Ill do my best to continue reports, thoughts, and analysis on macro economy and manhattan real estate trends.
Posted by anon
Tue Nov 6th, 2007 10:30 PM
Goldman's bonus pool this year is bigger than the Bear Stearns market cap. That should tell you something ... especially about bonuses at Bear. Q4 is shaping up to be worse than Q3 for most banks. Many banks have indicated that they intend to pay a bigger percentage of compensation in stock this year and going forward.I was in Saks the other day looking for a suit and there was a 40% sale. The guy told me his volume was way down because "wall streeters" don't expect to get paid nearly as much this year. Either people spend far too big a percentage of their income on suits or they think the bonuses will be decimated. I'd guess it's a bit of both.
Posted by dolly
Wed Nov 7th, 2007 08:23 AM
my friend is an exec vp at lehman bros. he said to me he was a little sad the other day, i asked why, he answere the bonuses this year arent going to be so nice.
Posted by anon
Wed Nov 7th, 2007 08:27 AM
Likewise work for a bank that was hit hard and the sentiment is similar. Hard to have any other expectations given the amount of layoffs as well. I'm also speaking at the VP/Director/MD level.
Expectations vary across friends at other banks around the street. Most acknowledge that bonuses will be down, some don't. Those who don't either work at Goldman or appear to be in some state of denial.
Posted by Anon
Wed Nov 7th, 2007 10:51 AM
I know the former head of IB at one of the bulge brackets (firm is middle of the pack with write-downs) and he said avg per capita bonuses will be down at least 40% vs last year and a "significant" % of it will be in stock that vests over five years (0/0/33/33/33).
Posted by ww
Wed Nov 7th, 2007 11:37 AM
Interesting thread. I am not in finance, but GF is: -5% in broker firm for this year bonus round and- much more significant- a hefty sum put aside for severance packages for 2008.
Reading this and other blogs I am not so sure anymore GS can escape again that easily. Their level 3 accounting is not better than others'. Lets wait for Nov 15.
Posted by Colgin
Wed Nov 7th, 2007 12:23 PM
Re Goldman's results. I thought this reader post from another blog (Russ Winter's execellent blog at Wallstreetexaminer.com) shows why they may have managed to show better results for the time being:
"Everyone in the media is gawking at Merrill Lynch about how poor THEIR particular risk management must have been. They keep parroting: ?What went wrong at Merrill??
Did it occur to any of them that maybe a big reason that Merrill?s results look far worse than their investment bank peers is because they are choosing to reveal things that the others are CONCEALING?
The media spotlight should be focused on the other investment banks. They are all rotten?not just Merrill.
At the other end of the public perception spectrum, contrary to the media spin, Goldman Sachs is not as ?golden? as everyone thinks.
The key mechanism that has allowed the investment banks to conceal losses is by throwing garbage securities that have NO BID WHATSOEVER into the Level 3 fictional accounting bin (mark to make-believe).
Merrill happens to be the MOST CONSERVATIVE in this regard among the investment banks?putting the smallest percentage of their total trading assets into the Level 3 bin.
Any wonder why their results why their results look the WORST BY FAR?
Merrill puts 2% of their assets in the Level 3 bin.
Now how about the revered and sanctified Goldman Sachs? How much do they throw in there?
15% of total assets?the most on Wall Street!"
Posted by justin
Wed Nov 7th, 2007 03:20 PM
bonuses will be down even if booked profit was steady or up, because firms can see sufficient uncertainty ahead they will pay based on expectation of profits next year, not results so far this year.
The other weakening factor is this: you don't need to over-bonus people who are unlikely to walk. Not many big traders are going to risk a move to another firm until they know how the markets are going to shift. Not many firms are going to dangle big signing guarantees in this current environment either.. if there your guys are not going to be stolen by your competitor, there is simply no reason to pay them as well. Everything else is just gift wrapping the bottom line number with words.
if the higher end ($2m+) in this market was driven by huge sacks of money from wall street then it is gonna go down.
Posted by Anonymous
Wed Nov 7th, 2007 05:03 PM
Bonuses will definitely be down in Fixed Income, my friends in Equities are having a great year and think their bonuses will be fine. Across the board I expect -10% to -15%. I agree with Cons above, job cuts will continue well into 2008.
Posted by drtomaso
Wed Nov 7th, 2007 06:24 PM
I have a friend at GS- they are just as frantic trying to make sure they dont have to report any markdowns as everyone else. That they haven't yet already is a product of when they have to report, their accounting methods, etc. Their level 3 exposure, and the subprime exposure therein is just a high as everyone else (read: larger than their market cap). Make no mistake about it- *all* the big players on the street have been playing the same game the last 2-5 years.
Bonuses serve two functions- to keep top talent from moving on and doing what they do best for themselves or your competitor, and to create a culture that will lure in new top talent. There will be significant downward pressure on bonuses street-wide, simply because some banks/hedge funds will be forced to lower their pools. This means even if your firm didnt take a hit, they can safely move funds into reserves (to insure against fall out from subprime, etc) because they know you wont pack up and move to one of the harder-hit firms.
Top talent will always be rewarded handsomely. The trickle-downers (junior people, it, support) will have to make do with less this year. And unfortunately, there arent enough top-5%-ers to keep the entire NYC RE market afloat.
Posted by drtomaso
Thu Nov 8th, 2007 09:11 AM
Its also important to note that the lower rungs of the RE market are very important. If I get a great bonus this year (I wont because I left Mother ML late in the season, after people stopped buying out bonuses), and decide to move out of my lux 1 bed in, say Brooklyn for a much more expensive lux 1 bed in Manhattan, I cannot complete my move until I find someone to buy my current place. With less people getting bonuses or getting lower bonuses on the lower and junior end, the demand pool at the bottom of the market is going to shrink.
Posted by anonymous
Sat Nov 10th, 2007 01:43 AM
Don't forget the 'trickle-downers'. They make decent, albeit not astronomical money, still enough to be able to buy real estate in say Brooklyn or Queens after a few years. You can probably expect more differentiation than in previous years, i.e. performers will do well, underperformers will see a nice cut and a sign pointing to the door.
Posted by drtomaso
Mon Nov 12th, 2007 03:20 AM
Anon-
You missed the point- the "trickle downers" are not going to be getting decent bonuses this year.
The bonus pool shrinks, moving money to cover losses. The company *has* to give competitive bonuses to its top performers or they will be someone else's top performers in a month. That means the "trickle-downers" get the scraps.
That means they stop buying starter homes in brooklyn and queens. That means the performer that bought in brooklyn two years ago and just got a nice bonus and would like to move up cant- despite having the money for the new place- because he cant find someone to buy his current place.