Bonus Bummer

Posted by urbandigs

Thu Jan 29th, 2009 09:41 AM

A: Some of the headlines of the bonus activity on wall street. Now, there is a growing rage regarding wall streeters receiving any bonus at all, given that their employing firms would likely have gone bankrupt if it weren't for taxpayer rescues and aggressive fed policy; and honestly, who can blame them. It doesn't look good! But I think most of the bonuses are going to top performing PMs and retentions to maintain talent. Basically wall street was completely dismantled, and investment banking is nothing like what it was during the boom years. This is not coming back anytime soon. For a housing market inflated from the uber-high paying jobs and bonuses on wall street, I would expect a significant correction in the high end for our local marketplace when all is set and done, now that the wall street world has changed.

UBS Slashes Its Bonus Pool for 2008 by More Than 80%

UBS AG, the European bank with the highest losses from the credit crisis, cut its bonus pool for 2008 by more than 80 percent. Variable compensation for the bank’s employees excluding brokers in the U.S. is being reduced, Andreas Kern, a spokesman for Zurich-based UBS, said in an interview today. The pool will be less than 2 billion Swiss francs ($1.75 billion), based on the 9.5 billion francs UBS has said previously it paid out for 2007.

UBS reduced bonuses after it was forced to accept a $59.2 billion government aid package in October, mirroring the U.S.’s capital injections for the biggest American banks. Now that governments have a stake in the industry, employees will be paid less and firms will have to prove they are rewarding talent based on performance...
Wall Street Bonuses Plummeted 44 Percent During 2008
Cash bonuses paid to New York City employees of Wall Street firms declined 44 percent last year amid record losses in the securities industry, state Comptroller Thomas DiNapoli reported today.

Financial firms disbursed $18.4 billion compared with $32.9 billion in 2007, DiNapoli’s office calculated, basing its estimate mainly on personal income-tax collections. While the decline represents the most ever in total dollars, the bonus pool remained the sixth-largest ever, the comptroller said in a yearly report.

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BofA Bonus Deferral Anger
Bank of America is planning to defer bonus payments to some investment banking staff this year – a move certain to inflame tensions between its employees and officials of newly acquired Merrill Lynch, executives familiar with the matter say.

With that probe under way, BofA was expected to tell staff at its capital markets and investment banking units on Thursday that it would be deferring payment of 2008 bonuses of $50,000 or more, according to executives familiar with the decision. BofA employees, who normally receive their 2008 bonuses in February, will be paid the first third of that sum in February 2010, with the remaining thirds paid in 2011 and then 2012, the executives said.

BofA insiders said the deferrals would be a particular problem for executives who had constructed a lifestyle around the near-certainty they would receive a bonus each February.
That BoA announcements is especially stunning. The thing is, the average base salary is about $150,000 - $250,000 or so, with bonuses making up the majority of the expected earnings for wall street employees. As most humans do, the lifestyle that an individual takes on usually follows the expected total income to be taken home. I wonder how many wall streeters either bought property or got used to a lifestyle that is suitable for incomes in the 350,000+ range? Now what happens when the money doesn't come in? How much was already consumed? How much was lost in their portfolio as equities plunged leaving less available to cushion any blow from job loss or loss of compensation? How much was expected to come in to be able to afford that $3M pad? Was a down payment placed on a high end new development with the expectation of a huge bonus coming in?

These are the things that happen when the tide goes out! The high end in Manhattan is especially vulnerable right now as the core of this crisis is on wall street and the high salaries and bonuses that employees got used to. While the 44% decline in bonus payments may not sound like armageddon to some, its pretty bad! What is to be expected in 2009? 2010? And what about all those employees that are not getting a bonus because they lost their job?

Problems arise when individuals are over-levered, over-exposed, over-consumed, and can no longer meet debt requirements to maintain the lifestyle that they took on. If they happen to own a high end property, with much of their wealth left there, guess what asset will be the first to go to make ends meet again? I'm sure many still have a good amount of equity left in these properties if they bought a while ago, but what kind of bids will they receive with the market so illiquid? I would think that owners of these homes still consider most of that equity to be there, until time comes to sell and they realize that bids are coming in so much lower; wiping out a good portion of that equity instantly.

I mean, are there masses of people buying $4-5M+ properties right now? I think the high end will see the most severe and surprising correction of the entire Manhattan housing stock as this adjustment plays on. For example, you may see a peak $7M property trade at $4M because the seller was forced to hit the bid and move the property; perhaps erasing 4-5 years of gains instantly. But I don't think we are at the point where a $1M property will trade at the same 43% discount. Also, be sure not to mis-interpret this statement to mean that all high end properties are selling at steep discounts right now! There needs to be the right setup for this to occur and that involves the high end property owner facing some type of distress and being forced to liquidate their asset or face default; and that means taking whatever bid is willing & able to close. When time pressure hits a seller, crazy things can happen.

Just last month, Doug Heddings of TrueGotham reports:
I have signed contracts on 4 properties over the last 3 weeks. Asking price last year of almost $5M ($1M overpriced and should have sold last year for $3.7M) selling to my buyers for under $2.5M.
So, its starting to happen already. According to Streeteasy's 4Q Market Report, the luxury market (defined by the top 10% of Manhattan condo/coop sales) saw sales volume for condos down 26% and co-ops down 32%! Was the 4th quarter a Lehman-induced anomaly or a glimpse of the new world here for Manhattan real estate? I have a feeling price discovery for high end sellers who were forced to 'hit-the-bid' over the next few quarters will be surprising to say the least.


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