That after last year's abysmal performance on Wall Street, best summarized by the following quarterly JPMorgan Investment Banking revenue and earnings chart, bonuses season would be painful should not surprise anyone. But hardly anyone expected it to be quite this bad. The WSJ reports that Morgan Stanley, likely first of many, will cap cash bonuses at $125,000 and "will defer the portion of any bonus past $125,000 until December 2012 and December 2013" with bigger 'sacrifices' to be suffered by the executive committee which, being held accountable for the collapse in its stock price, will defer their entire bonuses for 2011. Morgan Stanley is likely just the beginning: "As banks report fourth-quarter results this month and make bonus decisions for 2011, total compensation is likely to be the lowest since 2008." This means that once Goldmanites get their numbers later this week, we will likely see a mass exodus for hedge funds which remain the only oasis of cash payouts on Wall Street. Alas, unlike the Bank Holding Companies, a series of bad decisions will result in hedge fund closure, as the TBTF culture will never penetrate the stratified air of Greenwich, CT. And with bonuses capped at about $80K after taxes, or barely enough to cover the running tab at the local Genlteman's venue, the biggest loser will be the state and city of New York, both of which are about to see their tax revenues plummet. And since banker pay is responsible for a substantial portion of Federal tax revenue, look for Federal tax withholding data in the first few months of 2012 to get very ugly, making America even more responsible on debt issuance, and likely implying the yet to be re-expanded by $1.2 trillion debt ceiling will be breached just before the Obama election making it into the biggest talking point of the election cycle.
But back to the sad fate of banker bonuses and tiny violins:
At Goldman Sachs Group Inc., which, like Morgan Stanley, reports earnings this week, many of the roughly 400 partners can expect to see their 2011 pay cut at least in half from 2010, according to people familiar with the situation. Pay for some employees in the New York company's fixed-income trading business will shrink by 60%, with some workers getting no bonus, these people said.
Morgan Stanley is likely to cut compensation by 30% to 40% for many of its traders and bankers, especially those who focus on fixed income. Stock trading and parts of investment banking will likely be spared from pay cuts, though they are liable to have bonuses deferred.
Senior employees across the board will be affected by the changes in the makeup of the bonus, which for a Morgan Stanley or Goldman
Sachs trader can often outpace the continuing salary, according to the people familiar with the situation. The roughly 40 people on Morgan Stanley's management committee will see 85% of their bonuses deferred, a person familiar with the matter said.
The average of pay deferred, for all employees to whom it applies, will rise to about 75% from about 65% in recent years, this person said.
As for the footnotes:
The firm is taking a different approach with more-junior employees, or those without titles like managing director, executive director or vice president. Those employees, who often use their bonus money for day-to-day living expenses, will see only 25% or less of their overall bonuses deferred. Those employees who are paid less than $250,000 in overall pay won't have deferrals applied to their bonuses.
Of course, Wall Street workers may get paychecks this year from previous deferred bonuses. That will soften the blow somewhat from lower bonuses in early 2012. Morgan Stanley executives and many employees also receive part of their compensation in deferred stock.
Which brings us to another topic: namely the qualitative aspect of weekly initial claims (as opposed to just quantitative). Because while firings this year may have peaked at levels modestly lower than last year, it is the foregone paychecks which this year have soared compared to last year. Furthermore, with banks about to enter 6-12 months of global deleveraging as Basel III is knocking ever louder, the probability that many of the laid off bankers find a parallel job in the space is shrinking by the day. Which is precisely why we are very curious to see what TrimTabs tax withholding data indicates about the quality of terminations and lost jobs, because with the surge in banker layoffs and far lower bonuses, it is very likely that US tax revenues are about to fall off a cliff.