To most people it would be shocking that after $60 billion in litigation charges, i.e., the "cost of doing criminal business" for just the first 9 months of 2014 and a ridiculous $178 billion since Lehman...
[15]
... the there would be those who are stunned that bonuses on Wall Street may take a hit as a result of all this rampant, and caught, criminality.
Well, "those" exist. They are called bankers, the same group which in poll after poll heading into the end of 2014 predicted that this bonus season would be far better than what was paid out in 2013 (and most of which spent the money well in advance). Alas, that is not going to be the case.
According to the FT [16], bankers on both sides of the Atlantic are fighting over a diminished bonus pool this year, according to executives. In the UK, most investment banks expect to see bonuses fall after a tough year, but are still braced for political sensitivities over the topic given the looming general election. At US banks, several of which report results this week, payouts are also set to fall.
It wasn't just engaging in crime after crime and getting caught. Far worse: the one thing that everyone was lamenting, the lack of volatility, came back with a vengeance... and nobody was prepared (just see Jefferies results [17]reported one month ahead of the rest of the banks, for the trading bloodbath which took place in the past quarter).
The cuts will impact traders mostly, while advisory bankers are poised for modest rebounds after never having suffered as deep bonus drops in the past: "Traders can expect the worst declines after a weak fourth quarter. Citigroup decided last week that the bonus pool for traders would fall about 5-10 per cent, according to people familiar with the matter, after earlier pledging to hold it flat. Citi’s advisory bankers can expect a modest increase.
One finance officer at a large Wall Street bank said it had been difficult to satisfy the warring parties: mergers and acquisitions and equity underwriting enjoyed a good year but these advisory bankers never suffered the same bonus cuts as traders so they should not expect a big rebound in payouts.
In London people close to big City investment banks such as Deutsche Bank and Barclays said their bonus pools had been hit by weaker fixed-income trading figures and the impact of a European bonus cap, limiting payouts to no more than twice a banker’s fixed pay.
The bigger problem for banks is encapsulated by Tom Gosling, head of PwC’s reward practice, who said: “Bonuses in the UK banks will almost certainly be down, but the problem for the industry is that the public’s trust in banks has never really been rebuilt so, for some, any level of bonus will be too much.”
Remember when banks kept trying to slide through billions in criminal charges as one-time, non-recurring charges, and if you don't, re-read "For Bank Of America, Crime Is Now An Ordinary Course Of Business [18]." Well, it may fool non-GAAP numbers, but management teams have figured out that there is nothing non-recurring about a business model where crime is the primary driver of revenue growth. As a results, some banks, such as HSBC and Royal Bank of Scotland, are expected to deduct from their bonus pools part of the record $4.3bn fines for foreign exchange manipulation that they and four other banks – UBS, JPMorgan Chase, Bank of America and Citi – paid to regulators in November.
The biggest problem is that none other than industry-leader Goldman is slashing pay across the board. And without them to point to and demand equitable treatment, bankers everywhere are out of luck:
Goldman Sachs, often the barometer for industry bonuses, is forecast to pay staff about 38 per cent of revenues in salaries and bonuses. That would be in line with last year’s payout, which was the second-lowest in Goldman’s 15 years as a public company. Before the financial crisis, Goldman typically paid staff more than 40 per cent of revenues.
“The trend is that compensation is trending downwards rather than upwards,” said Mike Karp, chief executive of Options Group, a recruitment company. But US banks are being more generous than their European rivals, particularly by paying more in cash than stock.
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Mr Gosling at PwC, who estimates bankers’ bonuses have halved since the financial crisis, said: “The [other] problem that British banks have is that they aren’t the price setters in this market — that is the foreign investment banks.”
Still, don't cry for bankers just yet: "The top 121 UK bankers at Goldman Sachs were the best-paid among their peers in Britain in 2013, earning an average of £3m each, according to regulatory filings." But... the Office for National Statistics said total UK financial sector bonuses last year were down about a quarter from their peak in 2007.
There are of course hedge funds...
"With trading revenues still under pressure, Mr Karp at Options Group predicted more competition for traders who could make money. “The pie is not getting bigger; everyone’s going for a bigger slice,” he said. “The war for talent is going to heat up this year because everyone wants this 35-37 year-old who can make $200m in revenues, whether he’s in credit trading or rates trading.”
The only problem is that the vast majority of hedge fund traders have shown they can barely make $2 million in revenues in a market in which everything is now centrally planned, and where the "smartest" money in the room is merely super-levered beta chasers with zero original ideas, and where everyone piles into the same 10 most popular trades at any given time. Sorry, guys, but with such "value-added" you may as well try your luck making money in the real world, while actually doing something productive and constructive for the real economy.
That, and remember...