New York – 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 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.
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, N.Y. “It’s a business that’s driven by people who are driven to make a lot of money.”
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.
“You pay what one has to pay in order to attract the best and the brightest,” Sandy Weill, the former Citigroup chairman who ran brokerages and banks for almost four of his five decades in financial services, said last month. “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.
