Euphoria or Reality Over Upcoming Bonuses?
A: So, the largest bailout of wall street in the history of this country is likely to lead to another record year of bonuses as trading revenues soar from a massive liquidity driven rally across many asset classes. Naturally, brokers in Manhattan are quick to pick up on the media opportunities that key words like 'record bonuses' can produce. Positive spin usually means higher sales volume. Higher sales volume means higher profits. It's a mantra that is embedded into the culture of this complex and always interesting housing marketplace. While some buyers employed in the financial services industry plan a future home purchase around their bonus, in no way do I see the same euphoria from wall streeters that existed in 2007. Expect a normal wall street bonus season, nothing more. Lets keep it real.
I'm tempted to write about these topics when I go out in the field and see a listing broker justify a wildly overpriced property with talk of the current economic boom and upcoming massive bonus handouts. Puuuuhlease! So should we throw recent comps completely out the window now?
Do people still fall for this crap, or do they internally laugh at the agent that dishes out the gold plated poo? Do we honestly think the idea of expected bonuses alone will move markets significantly higher to the point that we start to see higher end trades closer to peak levels? To hear that one broker talk, that is exactly what should happen. Here are two recent bonus headlines:
NY Times: "Bonuses Put Goldman in Public Relations Bind":
For Goldman employees, it is almost as if the financial crisis never happened. Only months after paying back billions of taxpayer dollars, Goldman Sachs is on pace to pay annual bonuses that will rival the record payouts that it made in 2007, at the height of the bubble. In the last nine months, the bank set aside about $16.7 billion for compensation — on track to pay each of its 31,700 employees close to $700,000 this year. Top producers are expecting multimillion-dollar paydays.WSJ.com: "Bonus Pools On Wall Street Continue To Fatten":
Goldman employees reaped rewards that most people can only dream about. Goldman paid out $4.82 billion in bonuses last year, awarding 953 employees at least $1 million each and 78 executives $5 million or more. The rewards for 2009 will be far greater.
While bonuses were down across the industry last year, this year bonuses are starting to soar, with some companies set for a record compensation year. U.S. banks and securities firms are on track to pay employees roughly $140 billion this year, a record high, according to analysis from The Wall Street Journal.
JPMorgan's CFO, Michael Cavanagh, talked about bonuses Wednesday during the company's earnings call. The investment bank professionals' bonus pool is $8.78 billion for the three quarters of the year, compared with $6.5 billion last year. Asset management compensation set aside for the three quarters is $2.4 billion.
This year, bankers will certainly be paid better, as JPMorgan generated investment banking income of $10 billion in the first three quarters this year, up from $1.5 billion a year earlier. Cavanagh declined to say how much more the bankers will be paid. "We'll await final guidance from regulators" on compensation, he said, but "ultimately performance will determine compensation" at the end of the year.
My thoughts for the 2009 bonus season are that yes, bonuses will be handed out as trading revenues and investment banking revenues were solid for 2009. But how will it affect our most active time of the year, typically late January to late April or so? The key is to know where we came from and where we been. This market has already priced out fear and bids have stabilized and slightly improved across all price points. So what now? Do bids need to continue to surge higher to satisfy newly adjusted sell side expectations? Surely, I hope not as that will usher in another disconnect; but if it seems to happen out there I'll write about it. We should be excited at how well this market came out of the mess we were in only one year ago. Why do we have to complicate it with babble that bonuses will power prices higher to peak levels!
As usual, the industry focus will be on terms like 'record bonuses' or '$140 billion' - those key words that can change a buyer or sellers' decision making process instantly. Could it be that bonuses that are not even handed out yet can make one's property increase in value in the months leading up to the handouts? Silly when you think about it this way isn't it.
What I don't hear are terms like: distribution of cash component vs stock options, deferred stock compensation, clawbacks, ROE shares deferred, toxic asset bonus fund (credit suisse in 2008), other government tax policy on future bonuses, etc.. By last check, the Credit Suisse Toxic Asset Compensation fund was up 17% for 2009.
Thankfully, Andrew Ross Sorkin enters the argument with his "Don’t Fail, or Reward Success" column:
Goldman’s executives are paid mostly in stock, which vests over three years starting at the end of the next year, so it is more like a four-year period. Excluding the eye-popping bonus numbers, no Goldman Sachs executive made more than $225,000 in cash last year. Mr. Blankfein and the rest of his management team, in deference to popular opinion at the time, waived their compensation completely.Of course you will get your typical retention of talent and structured employment contract compensation handouts too. This behavior tends to spread across the industry as firms make efforts to get outside talent and retain their top performers.
So even though many of Goldman’s executives may make tens of millions of dollars, it is only on paper so far. And Goldman may impose a clawback provision that would require employees to give up some of their compensation if trades go the wrong way, similar to ones that Morgan Stanley and several others have already proposed. That’s the good news.
The bad news is the absolute number. It is far greater than any other bonus figure on Wall Street. Goldman says that its compensation program is based on pay for performance, and it is hard to argue that it has not performed well.
So what will buyers do with this cash? Move up? Move in? Pay down debt? Save?
Let us not forget that the ones getting the big bonuses are also the ones that study the fundamentals, trends, and economic data all day long. Most of the guys I talk to credit the reflation trade for stabilizing our market, but not for being strong enough to lead to a new series of year-after-year-after-year upward movement in prices! Pay market value, sure. Pay a steep premium over recent trades for future profit potential in a market that is appreciating? Umm, not so much.
You can't make life decisions based on one good year and I certainly don't expect masses of wall streeters to willy nilly throw money around. With that said, this bonus season will be healthy and big payouts are coming; but how this money is taxed, distributed, allotted in cash or deferred stock options, clawed back, or regulated are big unknowns that don't jive with the typical real estate broker whose job it is to transact Manhattan property. The anger by the American people is likely to grow louder and the headlines will call for changes in compensation rules as regulatory reform is drafted. Will lawmakers get tough on wall street? Doubtful at least not this year and especially as a full recovery is yet to take place; but time will tell. The difficulty will continue to lie in how compensation packages are structured and how that ultimately affects risk taking. What will Mr. Ken Feinberg do!
Back to our local markets, expect the typical broker babble and a fairly normal wall street bonus season as if it was 2005 or 2006 - not the euphoria that came with the 2007 bonus season as trades later deemed as outliers started to take place. If sellers tweak pricing strategy and expect bids to significantly improve, the active 'wall street bonus' months can turn out to be, well, not so active! Last year was a different story with a delayed seasonality effect occurring as our market's downturn was ultimately defined in the months from October of 2008 - March of 2009. The normally active JAN-APRIL was pushed back to MAY-AUG or so as the correction completed itself. The upcoming bonus season should be 'business as usual'. Let's just not over hype it.