The Dwindling Dollars
February 25, 2008
By Jessica Papini
Wall Streeters putting the kibosh on luxury trips and Hampton summer-house rentals most likely will not happen -- at least for the investment bankers and specialists who were able make plenty of money last year. However, the backdrop for fixed-income and structured product professionals may well be a different story.
It's no secret that the second half of 2007 was a rough one for the markets. Revenue at bulge-bracket names including Goldman Sachs, Citigroup, Bear Stearns, JPMorgan, Lehman Brothers, Merrill Lynch and Morgan Stanley declined by 6.1% in 2007, to $263 billion from $279 billion in 2006, according to Equliar, an executive-compensation research firm in Redwood Shores, Calif.
Across Wall Street, bonuses on average were flat to down 5% versus 2006. Bear Stearns' bonus pool was $2.06 billion this past year, down from $2.61 billion in 2006. The exception, not surprisingly, was Goldman, which so far has been mostly unscathed by the subprime crisis. Its bonus pool jumped 23%, to $12.1 billion in 2007.
Fixed-income group bonuses declined by as much as 30%, and the carnage in groups involved with collateralized debt obligations (CDOs), asset-backed securities (ABS), mortgages and structured finance has been well documented. For example, associate ABS traders at Lehman saw bonuses drop 10%, while UBS directors of cash CDOs in London saw bonuses decline 70% from 2006. JPMorgan managing directors of credit hybrids and correlation trading received bonuses 15% lower than 2006.
But there were several areas -- investment banking, commodities, equity derivatives and equity cash, foreign exchange and M&A -- where top performers were definitely compensated well.
"Indeed, those areas that were particularly profitable, such as M&A advisory, equity capital markets and commodities, ended up subsidizing other departments," says Achim Schwetlick, a New York-based partner at The Boston Consulting Group.
The average banker's bonus was down 5-10% this year, although that was coming off the robust levels of 2006. Bankers' compensation would have been higher if not for the problems in the credit markets, as banking had to subsidize fixed-income areas, notes Alan Johnson, managing director at Johnson Associates.
Bonuses were down, but most professionals involved in the industry had already lowered their expectations of what they would be receiving, says an investment banker at a bulge bracket firm. The numbers were within the range of what people were expecting, he said.
Compensation for an average head of investment banking was $2.1 million, with the low end at $1.07 million and the high end collecting $4.02 million, according to data from Johnson Associates.
At that high end was Goldman Sachs, where employees on average made $661,490 in 2007, including salary and bonus, a 6.4% increase from $621,793 in 2006. Bear Stearns employees were paid $241,998 on average last year, a 24% decline from $320,139 a year earlier. Merrill Lynch employees saw a steep compensation decline, to $196,479 in 2007 from an average $234,004 in 2006.
While the numbers vary by firm, the ongoing turmoil is leading nearly all banks to get creative with payouts, mostly because they have no choice. Professionals across the board depend on large year-end bonuses, which make up a big portion of their compensation. Packages typically consist of cash, stock and stock options.
"Almost without exception, everyone's payout changed and there was an inordinate amount of employees paid in stock and that will continue in 2008," Johnson says. "It was a dramatic change, but banks did not have the money to pay cash and take an immediate accounting expense," he says.
JPMorgan bankers earning more than $2 million, for instance, received 10% more in stock than they did in 2006. UBS capped its cash payment at $750,000, and employees making more than that received a 100% stock bonus. Citigroup top managing directors received a two-year stock retention package, while Merrill Lynch is paying employees 60% cash and 40% stock, compared to 75% cash and 25% stock in 2006. At Lehman, compensation payouts were 9% higher than last year, but bonuses declined 9%.
The outlook
Recruiting will be down this year, and hiring is not intense from the large banks, as they focus on getting business back on track, recruiters agree. Large Wall Street firms are not yet certain what business lines will carry them through the year, Johnson says.
Despite the difficulties being encountered in various markets, some observers project bonuses will remain at about the same levels for investment banking, with the big change not occurring until 2009.
So, where's the money to be made this year?
Emerging markets, commodities and risk management, recruiters say. The Asia Pacific and Latin America regions are in focus even more this year given their resilient performance, says Schwetlick.
Another trend this year is moving candidates to emerging-market office locations. Candidates and professionals who are willing to move back to their native home or relocate will also have plenty of opportunities, especially around Dubai and Asia.
Les Carter, veteran recruiter with Carter Stone & Co., agrees, noting that his daughter-in-law works for Morgan Stanley and recently moved to Hong Kong from New York for a year. "Professionals who are willing to move and who have good trading, legal and business management skills will see opportunities in Hong Kong and Asian countries," he said.
Employees who are even slightly experienced and familiar with local customs in emerging markets are being wooed, recruiters agreed. (Most overseas employees are paid in US dollars, although in Latin America banks typically pay in the local currency.)
"It's very exciting for young people to get contracted out overseas, and it helps with a promotion once they come back to the US, as they have an advanced skill set and more experience," Carter says.
Another area that should benefit from the current market environment is interest-rate trading, including US government bonds, says Schwetlick, noting that investors are shying away from risks they don't understand. "Credit trading and high-yield trading will not perform well because investor confidence is low and focus is on high-quality risk," he says.
Michael Karp, founder and CEO of Options Group, a New York executive recruiting firm specializing in the financial services industry, says banks are looking to hire specialists who know how to create products in equity derivatives and other complex structured products.
On the investment banking side, the year is expected to be difficult. There are "no IPOs, private equity business is down, and capital markets are not doing well," Johnson says.
"The first quarter has been dismal, however, areas of healthcare, energy and aerospace should prevail," according to Tim Carrington, managing partner at Aspen Partners.
While investment banking is definitely slower this year, business is busy and entails getting in front of clients more frequently, an investment banker says. In prior years, bankers were able to pitch private equity firms to buy companies, but now those deals are not available, he notes. "It was kind of like low-hanging fruit to pick," he says.
Bankers now have to be more thoughtful and work harder to develop deals, he adds. There are not many deals in fixed income, equity markets are basically closed off, and M&A is difficult as companies are more wary of using their own shares given where the stock and valuations are.
Meanwhile, there is likely to be brisk hiring on the legal side. "Banks will be spending more money on regulatory and compliance than they have in years past given the credit crunch and current economic conditions," says V. Gerard Comizio, a senior partner in the bank regulatory group at law firm Paul, Hastings, Janofsky & Walker.
Risk management compensation will increase in 2008. Risk management payout jumped 15-20% last year, and in 2008 salaries should go up another 15-20% as hedge funds and sell-side firms prioritize the hiring of risk managers, especially at firms with active structured or complex product desks, says Options Group's Eric Moskowitz, head of compensation consulting.
Commodities also continue to be a favorable sector, with demand from China still strong. "It's a great area to be in this year, with no layoffs and big bonuses," projects Carter.
The outlook on the year involves more international business, as well. Increased cross-border activity is likely, in part because of the euro's strength, and more international investors will look to the US for buying opportunities, says Schwetlick.
Banks such as Australia's Macquarie and French-based BNP Paribas are looking to increase their presence in the US. Japanese financial-services giant Mitsubishi UFJ Securities also is expanding in the US.
It's obvious that the pace of last year's record M&A activity likely won't be reached this year. But CEOs will take the opportunity to build an organization, and with the right strategy will be able to catch the next market up cycle, Karp says.
In 2007, M&A totaled $4.4 trillion on 42,959 deals, compared to 2006 with $3.6 trillion and 38,635 deals, according to Thomson Financial. Thus far this year 4,101 deals have been done, valued at $289 billion.
"The large investment banks will start to focus on smaller transactions because they may be the only deals around this year," says Richard G. Lipstein, managing director at Boyden Global Executive Search.
Additionally, more deals such as Bank of America acquiring Countrywide might happen this year, and there is some hope that Microsoft's play for Yahoo!, among other proposed transactions, may help jumpstart the M&A engine. "Strategic buyers are in a better position than private equity firms to close deals because they don't have to finance them with large amounts of debt," says Lipstein.
Where did everyone go?
There have been continuing layoffs at every major bank on Wall Street. Bank of America cut 30% of its equity research department last month. Credit Suisse wrote off $2.85 billion on its asset-backed investments and laid off some traders after finding pricing errors on the books last week. Even Goldman announced layoffs this month. Collectively, banks cut 26,000 jobs and announced $125 billion in write-downs from August 2007 to January 2008. Shakeups across upper management have been extreme, including the ouster of CEO Charles Prince at Citigroup, James Cayne at Bear Stearns and Stanley O'Neal of Merrill, along with Zoe Cruz, who was removed from her co-president spot at Morgan Stanley.
Layoffs are sure to continue, and banks will look at the bottom rung of employees moreso than different business sectors, Johnson says. Banks still need to get lean, and are thinking of cutting their bottom 10%, recruiters say.
"As talented and top-tier professionals get caught up in layoffs, investment banking boutiques and independents are looking to hire those specialists," says Rik Kopelan, partner at recruiting firm Capstone Partnership in New York.
Many teams in the market are expected to just change addresses, recruiters say. Hedge funds are looking to take advantage of disparities in the market. Due to massive layoffs in structured products, some hedge funds are hiring professionals because "there is money to be made in the area if professionals know how to play the market right," says Carter.
Competition for jobs is intense, as there are only so many options for professionals. Experts agree that smaller boutiques and middle-market banks, international banks and buy-side firms are looking to take advantage of layoffs and hire displaced professionals. Other financial services areas such as insurance companies are looking to pick up staffers as well.
Private equity is not necessarily a safe haven for laid-off professionals, with business slowing down dramatically in the past six months. Deals are not getting financed, and large transactions seem a distant memory.
Interestingly, business school graduates are not finding the market tough despite the recent spate of firings. According to data from Wharton Business School at the University of Pennsylvania, 736 students were seeking full-time employment in 2007 and 28 did not receive a job offer. In 2006, 707 students were looking for jobs, and 41 reported no job offers. Graduates of 2007 that went into investment banking made an average of $215,000, according to Johnson Associates.
Yes, this year is predicted to be difficult, but it may not be as bad 2001 and 2002. "It's going to be an old-fashioned down year with layoffs and compensation down," Johnson says. "Some people will choose to get out of the business. When business is up, Wall Street is a great place to be, when it's down, some people don't want to stomach it."
© 2008 Investment Dealers' Digest Magazine and SourceMedia, Inc.
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Tuesday, 18 March 2008
Bear Stearns Executive Bonuses Greater than JPMorgan Purchase Price for Entire Company.
Investment guru Jim Rogers on the Bear Stearns bailout:
On why Bear Stearns was bailed out:
You know the reason they did it this way was because, if Bear Stearns had to declare bankruptcy, you'd realize that Bear Stearns paid out billions of dollars in bonuses in January - six weeks ago. If he let them go into bankruptcy, they all would have had to send back their bonuses.
This is what they're doing, they're doing it so they don't have to give back their bonuses. That's why they didn't put them into bankruptcy. Jamie Dimon has gotten a great deal because the Federal Reserve is paying for it. The Federal Reserve is using taxpayer money to buy a bunch of Bear Stearns traders' Mazeratis.