Real Estate News

Bonuses at Wall Street Big Five
Surge to $36 Billion (Update3)

By Christine Harper

Nov. 6 (Bloomberg) -- Never in the history of Wall Street have so many earned so much in so little time.

Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. are about to reward their 173,000 employees with $36 billion of bonuses. That's a 30 percent increase from last year's record, and it doesn't include the billions more that will be paid by Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., the three largest U.S. banks, as well as the hundreds of hedge funds and private-equity firms that constitute the financial industry.

Enriched by the unprecedented value of takeovers, equity trading and credit derivatives, ``this year will be the best ever for the major brokerage firms,'' said Brad Hintz, an analyst at New York-based Sanford C. Bernstein & Co.

The average windfall for each individual at the five largest U.S. securities firms will be enough to buy a $165,000 Bentley Continental GT, the two-door coupe favored by Paris Hilton and Cher. They'll have plenty of change for a box of Romeo y Julieta cigars and a case of Pol Roger champagne -- the stuff enjoyed by Winston Churchill, Britain's prime minister in the 1940s and 1950s.

Credit-default swap specialists, who speculate on companies' ability to repay debt, won't be the only winners this year.

New York City cut the estimate for its budget deficit by 87 percent last week, in part because of the investment banks' better-than-expected earnings. The state comptroller's office said Oct. 17 that tax receipts from the financial industry's wages will rise 14 percent to $2.4 billion in fiscal 2006.

Ferrari Sales

Dolly Lenz, Manhattan's doyenne of high-end properties, is timing some of her best listings to coincide with bonus season. Ever since the 1970s, the UJA-Federation of New York has held its annual bankers' fundraiser on the first Wednesday in December, a date chosen because it was when Bear Stearns told employees what their bonuses would be.

``When Wall Street does well, we do well,'' said Richard Koppelman, owner of Greenwich, Connecticut-based Miller Motorcars. Koppelman is readying a $150,000 red 2005 Ferrari 360 Modena F1 convertible for a customer who will be getting his first bonus since graduating from business school two years ago.

London's investment bankers, traders and hedge fund managers will get 8.8 billion pounds ($16.7 billion) in bonuses this year, up 18 percent from last year, the city's Centre for Economics and Business Research Ltd. predicts.

`Multiplier Effect'

``We estimate that about 50 percent or more will end up in property, driving up property markets,'' said Jonathan Said, senior economist at the CEBR. ``There is also a multiplier effect trickling down to the construction companies, and people spend more on luxury goods, eating out and holidays.''

Conditions for money-making worldwide are some of the best ever. The global economy is in its fourth straight year of growth of more than 4 percent, stock indexes in the U.S., Hong Kong, Canada, Mexico, Spain and Brazil are at or near records, and corporate-debt defaults are at historic lows.

Leveraged-buyout firms attracted more than $170 billion of new money this year, helping to drive $2.9 trillion in takeovers and a surge in loans, according to data compiled by Bloomberg and London-based Private Equity Intelligence Ltd. More than $110 billion poured into hedge funds in the first nine months, beating the last annual peak in 2002 and fueling demand for stocks, bonds, commodities and derivatives, which are used to hedge risks and for speculation, and can be linked to specific events like changes in the weather or interest rates.

Creating Wealth

Securities firms took bigger risks of their own on trading bets and private investments. Goldman and Merrill reaped gains from stakes in companies such as Beijing-based Industrial & Commercial Bank of China Ltd. and Hertz Global Holdings Inc. of Park Ridge, New Jersey.

Combined, Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns earned $21.3 billion in the first nine months, surpassing the full-year record of $20.4 billion in 2005.

``There's no industry that's as consistent in creating wealth as broadly as investment banks,'' said Gary Goldstein, chief executive officer of New York-based Whitney Group, which specializes in recruiting for financial-services firms.

Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns are representative of Wall Street's largesse because they account for more than two-thirds of its capital, data compiled by the Securities Industry Association show. They'll report $128 billion of combined revenue this year, according to the average estimates of analysts surveyed by Thomson Financial.

Four-Star General

The five firms set aside 40 percent to 50 percent of revenue to pay compensation and benefits. Each holds back about 60 percent of that amount for year-end bonuses, said Hintz, who previously was chief financial officer at Lehman and treasurer at Morgan Stanley. Boutique banks such as Lazard Ltd. distribute an even larger share of revenue to employees.

``We'd like to see comp ratios coming down given that earnings are going to be at record levels, but my expectation is they won't,'' said Mark Bronzo, who helps manage $700 million, including shares of Goldman and Lehman, at Gartmore Separate Accounts LLC in Irvington, New York. ``It's a business that's driven by people who are driven to make a lot of money.''

Goldstein said ``a small number'' of the industry's employees will get awards of $20 million or more, ``meaning there's an awful lot of people at the lower end who are going to make $150,000.'' Even so, the average bonus will exceed the $177,852 the U.S. Army pays a four-star general with at least 26 years of experience to serve in Iraq or Afghanistan, including allowances for family separation, hazardous duty and imminent danger.

Like Peacetime Boom

While public opposition to the Iraqi occupation weighs on tomorrow's U.S. election, war doesn't cast a pall over Wall Street the way it once did.

In 1940, when Churchill declared, ``Never in the field of human conflict was so much owed by so many to so few,'' to describe his country's debt of gratitude to the airmen who fought in the Battle of Britain, the Dow Jones Industrial Average fell 13 percent. This year, the Dow average is up 12 percent and it has gained 45 percent since the U.S. and Britain invaded Iraq in 2003.

``Unless the price of oil gets mixed in here, I think they're just operating on totally different spheres,'' said Charles Geisst, professor of economics and finance at Manhattan College in New York's Riverdale neighborhood and the author of ``100 Years of Wall Street,'' published by McGraw-Hill in 1999. ``This is the sort of investment-banking market you expect in a strong peacetime boom.''

Goldman's Bonanza

The biggest bonuses, some exceeding $40 million, will go to traders who risk the firms' own capital on everything from crude oil to credit-default swaps, structured-finance specialists who package undesirable loans into hot-selling bonds and bankers who advise buyout firms.

Payouts for top performers in London will be up at least 25 percent from last year, according to Aidan Kennedy, a partner in the financial-services practice at Christian & Timbers, a recruiter in the city.

Nowhere will the bonanza be bigger than at New York-based Goldman, which is set to report an industry record of $8.43 billion in profit, up 50 percent from last year.

At Goldman, total pay will average $659,000 per employee, based on analysts' estimates for $35.7 billion in revenue, the firm's average compensation ratio of 47.4 percent for the past five years and a payroll of 25,647 at the end of the third quarter. That includes an average bonus of about $398,000.

Asian Investments

``You pay what one has to pay in order to attract the best and the brightest,'' Sanford Weill, the former Citigroup chairman who ran brokerages and banks for almost four of his five decades in financial services, said in an Oct. 27 interview. ``Companies have to be competitive or they're going to lose their good people.''

Goldman's principal-investments unit, led by 48-year-old Richard Friedman, invests money on behalf of the firm and its employees. It may be among the biggest beneficiaries of this year's bonuses, said Whitney Group's Goldstein.

The firm's 5 percent stake in China's Industrial & Commercial Bank has swelled by $4.5 billion since the country's biggest bank went public last month -- just six months after Goldman acquired its holding. That should mean outsized awards for the bankers who oversee investments in Asia, including 50- year-old Henry Cornell and his Hong Kong-based colleagues Hsueh Sung and Andrew Wolff, who was made partner this year.

Retention Strategy

Goldman's trading division is another likely winner. It produced $17 billion of revenue in the first three quarters of this year, up 58 percent from $11 billion a year earlier. The division's three co-heads, Michael Sherwood, 41, who's based in London; J. Michael Evans, 49, in Hong Kong; and Thomas Montag, 49, notched a 50 percent increase in revenue from equity trading and 63 percent gain in fixed income.

Montag is moving to New York from Tokyo at the end of the year to become head of trading in the U.S. He'll succeed Gary Cohn, 46, who became Goldman's co-president with Jon Winkelried, 47, in June.

``If you're a top trader at Goldman Sachs, and you're not getting paid, you're going to go start your own firm,'' said Kyle Cerminara, a financial-services analyst at Baltimore-based T. Rowe Price Group Inc., which oversees about $300 billion, including shares of Goldman, Morgan Stanley, Merrill and Lehman. ``You want them to retain the best people.''

Goldman spokeswoman Andrea Raphael declined to comment.

Surge in M&A

At Zurich-based UBS AG, Europe's biggest bank by assets, Chief Financial Officer Clive Standish said bonuses will increase more for bankers who arrange mergers and acquisitions, while fixed-income traders will ``find themselves flat on the year.'' After three years in the shadow of trading, M&A, the business with the fattest profit margins in the industry, is at record levels for the first time since 2000.

UBS's revenue from fixed-income trading rose 16 percent in the first nine months to 6.45 billion Swiss francs ($5.18 billion). The bank has arranged $401 billion of takeovers completed this year, up from $226 billion at the same point in 2005, and increased its market share in M&A to 19 percent from 13 percent.

``Compensation in this business follows revenues and performance,'' Citigroup Chief Financial Officer Sallie Krawcheck said in an interview last month. ``It's very simple that way.''

Charities Track Bonuses

Still, no one in the industry is suffering. At $36 billion, the bonus payouts from the five biggest securities firms alone will top the annual budget of the National Institutes of Health, the U.S. medical-research agency, and approach the $42.7 billion of funding that the Department of Homeland Security requested for 2007. The United Nations World Food Program budgeted about $3.5 billion this year to feed 79 million people in the world's poorest countries.

Few charities miss the opportunity to remind traders and bankers that bonus season is a time to give. The UJA-Federation, a Jewish philanthropy, is holding its annual benefit for about 1,400 guests a month from now. This year, the organization aims to raise at least $21.9 million, up from last year's record $20.4 million, said Joy Prevor, an associate executive director in the fundraising division.

``It's really the climax of our campaign because it follows bonuses,'' Prevor said.

At the charity poker game that followed last year's fundraiser, prizes included lunch with Lloyd Blankfein, 52, who became Goldman's chairman and CEO this year, and Warren Spector, 49, president and co-chief operating officer at Bear Stearns.

Widening Gap

While the enormity of this year's bonus pool will further distance Wall Street from the rest of the economy, it's also widening gaps within the industry. For managing directors, the highest pay grade at most securities firms, bonuses used to range from $1.5 million to $2.5 million. Now managing directors are divided by a gulf from $700,000 to $7 million, Whitney Group's Goldstein said.

``They pay the guys who are investing the firm's capital a lot more than they pay the people who are acting as agent, generating leads,'' Goldstein said. ``There's always this concern they're going to lose some of their best people to hedge funds or private-equity firms.''

No matter how big the bonus, the inevitable question is how to spend it.

Lenz, a vice chairman at New York-based realtor Prudential Douglas Elliman, said she sold a $27.5 million apartment last year to one hedge fund client who was expecting a $30 million bonus. This year, Lenz has an $11.9 million apartment on New York's Park Avenue and condominiums in Soho starting at $3.5 million lined up.

Bonus Table

``Thank God for bonus season,'' Lenz said. ``Last year until the end of November was kind of lackluster and then that six-week period made the year better than any year we've had.''

The following table shows the calculations for total and average bonuses for each of the five biggest U.S. securities firms, based on estimated revenue, compensation and benefits and number of employees. Figures are in billions except for percentages and averages:

Firm           Goldman   Morgan    Merrill   Lehman    Bear

Total Revenue  $35.7     $33.6     $32.5     $17.4     $9.0

Comp/Revenue   47.4%     41.8%     49.5%     50.1%     48.8%

Total Comp     $16.9     $14.0     $16.1     $8.7      $4.4

Bonus Pool     $10.2     $8.4      $9.7      $5.2      $2.6

Employees      25,647    54,349    55,300    24,775    13,000

Average Comp   $658,946  $257,594  $291,139  $351,160  $338,462

Average Bonus  $397,707  $154,556  $174,683  $210,696  $203,077

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net .