Looking Ahead to 2012's Wall Street Bonus Season

Posted by urbandigs

Mon Sep 5th, 2011 09:21 AM

A: It seems that the worries of a few years ago regarding the effect of a changing wall street and future regulation post credit crisis are starting to happen now. All those wall street jobs associated with investment banking divisions tied to the mortgage securitization 'profit machine' are severely pressured. Now more than ever wall streeters have to worry about what they are bringing to the table for the firm. As for those holding deferred stock that vests soon or over the next year, ouch! Take a look at the stocks of these banks and IBs and its the markets' equivalent of a clawback on past deferred bonuses tied to stock. I'm starting to hear about continued less cash and more deferred options for awarded bonuses and that the always desired longevity bonus is not a guarantee for this year. Lets discuss.

Make no mistake about it, fixed income bankers will see the worst of the bonus cuts/layoffs this year. All those sectors of wall street that should never have existed but did because of the housing/credit bubble, are under serious pressure to perform. And if they dont perform, headcount is reduced. Thats the reality on wall street post crisis.

Meanwhile, those that are producing are seeing higher base salaries and lower cash bonuses. If 2010 was about 2/3 cash and 1/3 deferred with potential for longevity bonus, 2011 looks to be about 1/3 cash and 2/3 deferred w/out the longevity bonus. These are the ramblings Im hearing about from my old wall street contacts; so Id love to hear from some wall streeters out there on what your hearing?

Here is the news so far on planned wall street layoffs:

Credit Suisse to axe 2,000...

UBS to layoff 3,500; 50% in investment banking...

Barclay's cuts 3,000 job...

Bank of America could cut up to 10,000; hit Merrill Lynch unit...

Goldman and Morgan Stanley announced cuts too, but nothing as drastic. And HSBC is looking to shed 30,000, but that is globally. Europe is seeing a bloodbath when it comes to investment banking layoffs and the lawsuits from housing agencies to big banking institutions for 'misrepresenting the risks" for 100s of billions of packaged asset backed securities (ABS), are just beginning to take their toll on the industry. Remember, when it comes to the banks its all about capital, leverage and liquidity and Europe's banking industry is under the heaviest pressure right now; dragging US banks down with it.

Back to our markets. Prior years bonuses that were tied to stock performance are getting the equivalent of a clawback right now with the recent pressure on bank shares. Think of all the deferred compensation tied to stock prices that are vesting now. Take one look at the XLF and its easy to see why what was awarded back in 2010 may not be worth as much as originally hoped today. Bank stocks are down between 10% and 40% from a year ago.

Bonuses are one variable in the ever complex equation of how wall street ultimately affects the Manhattan real estate markets. While the numbers may be down and the layoffs continuing, there are still plenty of high paying jobs and solid bonuses being handed out that will be used to buy property in this market. In my opinion, investor confidence tied to equity markets and volatility play a much bigger role when it comes to immediate impact on the Manhattan marketplace. As of now, we had plenty of volatility and a scare or two with equity markets around the globe; but nothing nearly as eventful as what we saw in late 2008 and into early 2009 causing a temporary 'disappearance of bids' for property. Put another way, if equities rally 10% from here by early 2012, it won't matter much if overall bonuses are down slightly from last year; the Manhattan market will continue to function. Time will tell.

As long as Gold is trading around $1,900/oz and 10YR US Treasuries are yielding below 2% all is not well, and I'll continue to be more concerned that the markets may have another round of fear/volatility left in them. It seems clear that its risk off right now and that US Treasuries are pricing in another wave of slowing global growth; its very likely we are in a recession right now that will be called later on by the NBER.

Personally, I rather the markets purge hard now and get it (bad debts exposed, over-levered under-capitalized banks/institutions fail) out of our system already so we can restructure and move past this debt deflationary episode faster and on better footing. Kicking the can down the road only prolongs this whole process. A fed engineered backstop and proactive reflationary policies to so called "calm" markets is not the making of a strong foundation for future economic growth and job creation. We still have some time and unintended consequences to deal with before we get through this cycle.

Until then, bonus talk is more of a media effect than anything. Instead, focus on credit, and equity markets (possible negative wealth effect of another equity selloff) and general confidence towards risk assets as more of a clue to how the Manhattan housing market might trend as this Euro-bank/debt situation plays out. How are buyers adjusting their bids in this changing environment? Are sellers hitting lower bids? It takes 4-6 months minimum to see the ultimate sales prices so lets keep our eyes on real time volume trends in the meantime.