“Wall Street Bonuses to go way of Dodo” – Bloomberg

Article in Bloomberg predicts that governmental control of Wall Street firms could kill bonuses. Bad news for Greenwich real estate sellers, if true (and great news for buyers, of course – they’d no longer have to compete against people earning 10X more). Seems to me, though, if Wall Street ever recovers and starts generating huge profits again, those clever boys and girls will figure out how to share in what they’ve produced. Fine – I’d rather return to the old system than have Chris Dodd and Nancy Pelosi setting other peoples’ salaries. My personal choice, as though that matters, is the Swiss bank’s idea of paying bonuses in shares of what its bankers had bought. If the stuff proves profitable down the road, everyone prospers. If the stuff tanks, it’s Havemeyer Park for you, young man.

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20 responses to ““Wall Street Bonuses to go way of Dodo” – Bloomberg

  1. OGRCC

    What? no comment on the bonuses doled out by wall street that was reported last night?

    just partisan BS. the sky must be falling if the government wants to regulate the sandbox that the wall street boys have been playing in.

    no one in their right mind actually thinks these wall street workers deserve that kind of compensation. they need to take a reality check

  2. CEA

    Chris: bonuses weren’t a huge part of compensation until the mid-to-late 1980s. What happened with Greenwich real estate prices in the 1960s and 1970s? What was the annual rate of increase then?

    If it is somewhat akin to what the inflation rate was, then we can say bye-bye to the 8-10%/year increases, and hello to the 2-3%/year increases. That is, once the “deflation” of prices occurs.

    Here is my $0.02. I think the Greenwich market is de-flating the 8-10% growth of the past 10 years. So:

    1999 house price: $1,000,000
    2007 house price (at 9% annual growth): $1,992,562
    2007 house price (at 2% annual growth): $1,171,659

    So, what you are seeing in 2008 and 2009 is the puncturing of the balloon of what I would call “excess profits” from the last 8 years.

    Example:
    So let’s say you bought a house in 2004. It had cost the previous owner $1,000,000 in 1999. Therefore you paid:

    1999 house price: $1,000,000
    2004 house price (9% growth): $1,538,624

    You go to sell it in 2009, having paid $1.5 mil. However, the market says (2% growth from 1999) that it is worth:

    1999 house price: $1,000,000
    2009 house price (2% growth): $1,218,994

    At best, market says $1.2 million.

    But I PAID $1.5! Just in 2004!

    Market says: Sorry, is is $1.2. 2% growth is the “norm”. 9% growth was outsized.

    Remember what Warren Buffett said: in the short-term, the market is a popularity contest. In the long-term, the market is a weighing machine. Greenwich real estate popularity is, unfortunately, over. Now we are being weighed.

    There is your metric, Chris. Enjoy.

    CEA

    • christopherfountain

      CEA – it’s OUR metric, as property owners in Greenwich, and what the heck – I may not like the reality of a situation, but I’ve never been too successful raging against reality. So thanks, I will enjoy it – or at least accept it and try to enjoy it. No one living in our fair town is without blessings, and I work on remembering that, and thanking whatever power is running this universe, every day. (Sun just came out – that’s nice, too!)

    • christopherfountain

      CEA – one slight quibble – bonuses were traditional on Wall Street when my dad was at White, Weld & Co., 1946-198?, I don’t know how he was paid before the war because I wasn’t around to ask him. But at the Fountain household when I was around, some Christmases were better than others. The real difference, I suspect, is that a Wall Street career, at least at my father’s level, paid a nice upper-middle class salary on a par with those who worked in advertising, banking and law. No lavish Carribbean vacations, but summer camp, a summer home shared with my father’s siblings and even ski camp at Otis Ridge in the winter. Yes, a life of hell, but I feel it made me a stronger person to survive it.
      It was in the 80s when bonuses suddenly surged from, say, 1/2 a modest salary to 10X that salary and more, and Wall Streeters were elevated light tears [ that was supposed to be “years” but, on reflection, I’ll leave it as is] ahead of plumbers and lawyers (well, maybe not plumbers). If those bonuses and their recipients are now falling back to earth I bet most of the people who used to earn them will learn to make do, just as the poor struggling Fountain family did. But property values will take a real whacking.

  3. CEA

    Chris, I wasn’t trying to be sarcastic, I was just trying to say – there is your way of valuing houses, since the “comparable sales” metric isn’t working (since nothing is moving). That you can pinpoint a time (1999), and factor in +2%/year, and that is what a typical Greenwich house is worth today.

    It of course gives me no joy, as I bought after 1999, but it IS reality, and it cross-checks with the sales that are happening. It is not that it is just “1999”, but that it is a removal of the outsized +9%/year back to the +2%/year growth rate.

    CEA

  4. anonymous

    “Modern” IBs of “high” comp really kicked-in in mid-’80s and peaked in CY07, both in size of bonuses and no. of highly-paid workers

    Many of smartest left IBs ~10yrs ago for various HF and PE shops….problem is those shops tend to have far fewer (though even higher-paid) employees and partners than IBs, so negative implics for Greenwich and UES real estate pricing

    Need to also consider fact that notion of paying 8-figs for any house (or apt) anywhere in US was rather foreign as recently as ’96….as is notion of monstrous, 8-fig wkend houses only reachable via NetJets….suspect much secular shift in style/quantity/quality of desired houses will occur over next 3-5yrs, let alone any nominal metrics of cost per sf or cost per acre of land

    BTW, always amusing to hear the class warfare vs anyone who earns more than the supposedly hard-working worker bee….mkt pays what mkt pays; life is only “fair” on Sesame Street

    Anyone <45yo today grew up knowing the financial industry was arguably world’s most lucrative…and chose colleges and career path appropriately….perhaps open jealousy from those left behind to be community organizers (or politicians) or to just live off a rapidly dwindling trust fund?

  5. anonymous

    CEA – I have been reading your comments on here for a while and I am very impressed with your intelligence. That sounds hokey, but there are so many well-educated people here in Greenwich that just don’t seem to have any brains. Your comments are always well thought out and well written. I know you went to GA, so I hope you are a reflection of what I can hope for my daughter after 14 years of tuition at GA (she’s in college now).

    Sometimes the truth is painful, but we have to deal with it. Thanks for you $.02!

    Thanks to Chris as well, for providing us with this forum!

  6. OGRCC

    Chris, you are forgetting that was back when skiing was an affordable family sport. Otis ridge is still affordable, but it’s no Okemo or Stratton.

    For families on a modest budget, I suggest Ski Butternut in Great Barrington MA for a inexpensive ski experience.

    Yes, greenwich used to have doctors and lawyers living side by side with investment bankers

    Class warfare you say? well we are all shareholders in the banks now…. so people can expect some griping when they learn of the compensation packages bestowed upon the so called masters of the universe. I say let them fail.

    and yes i learned a long time ago you are worth whatever someone pays you

    • christopherfountain

      OG, skiing had to be affordable because there were no IBs with a zillion dollars in disposable income to pay lift ticket fees. I doubt they ever go to Otis Ridge though. I sent my own kids there, on a mere struggling lawyer’s income and you’re right – still cheap. And unchanged, except that the Austrian instructors are gone (I was told by an instructor in Colorado a few years ago that we no longer need keep our feet together – a few inches appart adds balance. That made sense so I tried it but after a few runs confessed that all the way down I kept hearing a stern Austrian voice shouting, “Feet together! Feet together!”. So I still ski that way.)

  7. CEA

    anonymous @ 11:02:

    awww, you are so nice. A lot of it was my parents, strict upbringing, $0 in “aid” once college was over. I desperately wanted to do something “glam-o” like advertising, or publishing, and my father sat me down and said: “Here is what you make in advertising. Here is what you make in finance. While your friends are struggling, you won’t have to worry about paying bills, etc.”

    It stinks sometimes, because boy, I wouldn’t mind some (small) subsidy, say for tuition, but it did force me to work at a challenging job and learn.

    You are at G.A. in the “good” years, too. When I was there it was kind of a mess in the Alex Uhle years.

    anyhow, thanks for the compliment. One day I will do something blog-wise, I think. Poor Chris needs his forum back!

  8. CEA

    CF: I know there were bonuses (my padre also in finance), but it was the scale, not their existence, that I was referring to.

  9. OGRCC

    CF:

    I learned to ski at Otis back in 1980.

    I was there a couple years ago and it is still virtually the same, like walking into a time warp. same old austrian T-bar, and the chair lift is still functional… The J-bar is long gone but the towers and housing are still there.

    alas, the skis have changed. you can even use your uphill ski to edge and carve…

  10. Retired IB'er

    Guys,

    I was on the Street at a Bulge bracket firm in the ’80’s and ’90’s as an Investment Banker doing Mergers & Acquisitions (and LBO’s).

    Bonus payments were always a big part of compensation. However, the level of compensation exploded with the money supply (thank you Alan Greenspan) and the dramatically increased leverage employed by the Street (once again thank you Alan Greenspan, and others, for allowing increased leverage).

    Example: When I first started on the Street, a $500 million to $1 billion deal was big. Managing Directors worked on them and a $ 1 million fee was a big deal. Fast forward 25 years and a big deal is $50 billion and a big fee is $50 million and, of course, banker compensation increased dramatically.

    The other dramatic change is (now was because this game has changed) was the firms became much more involved in proprietary trading (for their own accounts using tremendous leverage). Goldman is referred to as (maybe now was) the biggest hedge fund in the world.

    Loose money and loose regulation led to outsize profits and outside losses, which as an aside makes you wonder whether the profits were ever there in the first place. The perfect storm for profits is gone for the foreseeable future and with it will be the outsize compensation levels for the “masses”. There will always be very good people who make very good money on the Street. The difference is in the past 8 years, mediocre people made very good money. That is over and the implications for Manhattan coops, Greenwich mansions and any other luxury items you care to name (private schools, restaurants, etc) are going to have to adjust to the new reality.

    There is a new sheriff in town and his name is Austerity.

  11. Krazy Kat

    There’s one issue for those toasting the govt’s killing of the bonus model to consider – DC can only dictate terms as long as it has an equity interest in the banks.

    Once a surviving bank returns to profitability, it can repay the govt and then (presumably) do what it wants.

    Recall, several of the Big 9 original TARP recipients claimed to not need the infusion. Assuming the govt is eventually repaid, it has little moral or ownership leverage with which to dictate compensation models.

    • christopherfountain

      We’ll see, Krazy Kat, but I smell a government takeover. Certainly Obama, Barney and Chris Dodd think they’ll be taking over.

  12. Retired IB'er

    Krazy Cat,

    The bonuses on Wall Street are going to change because the underlying business model has changed dramatically.

    The 30 t0 40 to 1 leverage that was typical, and created outsized profits (until the loses evicerated them) is not coming back! End of story: Goldman, Morgan Stanley, Merrill are now bank holding companies with leverage ratios of 10 or 12 to 1.

    Moreover, entire lines of very profitable businesses are gone, vanished. Think mortgage securitization markets.

    The governement changes are only “icing on the cake” as relates to compensation.

  13. Towny

    “Fine – I’d rather return to the old system than have Chris Dodd and Nancy Pelosi setting other peoples’ salaries.”

    -Did’nt Bill Clinton cap salaries of exec’s at public traded cos. to under a mil?

    • christopherfountain

      I think he did, Towny – if memory serves, thats when they all turned to options as payment and we had a whole new problem.

  14. Towny

    Dosent anybody know what a cash cow is?