End of the party: Wall Street tightens belt

By Daniel Schnettler Jan 22, 2012, 1:06 GMT

New York - Sharp declines in annual profits at Wall Street institutions like Goldman Sachs, Morgan Stanley and Merrill Lynch have meant a rude awakening for high-flying investment bankers, whose pay packets are directly linked to the bottom line.

'New Normal on Wall Street: Smaller and Restrained' ran the headline in The New York Times. 'Wall Street employees are feeling the squeeze this bonus season,' the paper said.

For the present, the days when the Ferrari was all but paid for and the champagne flowed at wild parties in the city's most exclusive clubs are gone.

A year of debt crisis, market uncertainty, a struggling US economy and fears of recession have forced the bankers to tighten their belts. The tone in some of the news media was scornful, with headlines referring to a 'bonus bloodbath.'

The indications are that the climb back upwards will be a long one, but sympathy nevertheless appears misplaced. At Goldman Sachs, employees will still receive average compensation of 367,000 dollars, although this is little more than half the 622,000 that was paid out in 2006.

The situation is similar at competitors like JPMorgan Chase, where an investment banker will take 342,000 dollars on average for last year's work, down from 370,000 in 2010.

These are average figures. Senior investment bankers continue to take home millions, but the 'rookies' - or junior bankers fresh out of college - have to be satisfied with much less than their counterparts in the fat years.

Stricter regulation is set to ensure that profits, and thus bonuses, will be restricted in future. 'While some of 2011's challenges may ease this year, Wall Street has to grapple with new regulations in 2012 that could whack profits,' The New York Times said.

The new 'Volcker Rule' means banks may no longer speculate on their own account, and new legislation has imposed higher capital requirements to ensure they are better able to cope with potential losses.

All of this means less scope for making profits. Goldman Sachs saw its profits fall 67 per cent in 2011 to 2.5 billion dollars, while rival Morgan Stanley experienced a 42-per-cent fall to 2.1 billion.

The outstanding year of 2006 provided profits of 9.4 billion dollars for Goldman Sachs, further establishing its record as the most profitable among Wall Street firms in the sector.

The high-rolling investment bankers are confronting another problem. Bonuses are to a large extent no longer to be paid out in cash, but in shares that their owners are allowed to cash in only after a stipulated number of years have passed.

The aim is to force them to think and act in the longer-term interests of the company instead of their own immediate concerns. This is intended to put a stop to unbridled gambling and was motivated by the 2008 bankruptcy of the Wall Street giant Lehman Brothers that sparked fears of a worldwide financial collapse.

Nevertheless, some banks earned more last year than ever, in particular those catering primarily to private customers. JPMorgan Chase, with its broad customer base, was able to boost profits by 9 per cent to 19.0 billion dollars, while Wells Fargo managed a rise of as much as 28 per cent to 15.9 billion dollars.

Regionally based companies away from the glamour of Wall Street, like US Bancorp and Sun Trust Financial, also flourished despite the difficult environment.

For years it was thought that doing business with ordinary US private customers generated little profit and that the big money was to be made on the international financial markets. This has now changed as a result of a change for the better in loans to main street customers.

With unemployment falling, US homeowners are once again paying their mortgage instalments on time, but employees of these institutions can only dream of the packages secured by Wall Street investment bankers.

A representative survey by jobs website Glassdoor.com reveals that an ordinary bank teller makes an average of 20,172 dollars a year, and even a branch manager will take just 52,942 dollars home. They can forget about that Ferrari.