Wall Street’s cash bonus pool fell by 14 percent last year to $19.7 billion, the lowest since 2008, as the securities industry shed thousands of jobs, according to projections by New York state Comptroller Thomas DiNapoli.
Employees took home an average cash bonus of $121,150 in 2011, DiNapoli’s office calculated in a report based on personal income-tax collections. The financial industry lost 4,300 jobs between April and December, according to the report.
Smaller bonuses reflect “a difficult year on Wall Street,” DiNapoli said today in a statement. “Profits were down sharply, and securities firms in New York City resumed downsizing in the second half of the year.”
Wall Street “faces continued challenges as it works through the fallout from the financial crisis and adjusts to regulatory reforms,” he said.
Profits at New York Stock Exchange firms’ broker-dealer units were no more than $13.5 billion in 2011, less than half of the $27.6 billion earned in 2010, making last year the second in a row in which profits dropped by more than half, DiNapoli said. In 2009, the units generated $61.4 billion in profit with the help of federal bailouts, interest-rate cuts and proprietary trading.
‘Profitable and Sustainable’
Cash bonuses in 2011 are expected to be about $2 billion more than the recession’s low point of $17.6 billion in 2008, and are a little more than half the $34.3 billion peak reached in 2006, the report said. Bonus estimates don’t include stock options or other deferred pay.
“Having Wall Street and the securities industry operate on a model that’s profitable and sustainable is preferable to what we had before, where you had high-risk behavior, high reward,” DiNapoli said today in an interview in his midtown Manhattan office. “When it came tumbling down, you had a deep dip and a great valley. That’s really what has caused a great deal of budget shock and revenue shock to the state and city.”
Skyrocketing compensation before the financial crisis encouraged state lawmakers to craft unrealistic budgets in expectation that Wall Street’s boom would continue forever, he said.
‘On the Sidelines’
Wall Street firms cut bonuses and delayed more payments after investment banking and trading revenue dropped in 2011. Deal volume and trading activity fell in the second half of the year as investors stayed on the sidelines amid concern that the European debt crisis would lead to a global slowdown.
Goldman Sachs Group Inc. said it cut discretionary compensation by more than 26 percent. Bank of America Corp. told investment bankers to expect a 25 percent drop in pay, people with knowledge of the discussions said last month. Credit Suisse Group AG cut its 2011 bonus pool by 41 percent and paid some senior staff in bonds backed by derivatives.
Morgan Stanley capped immediate cash bonuses at $125,000, a person briefed on the plans said last month. Deutsche Bank Group AG set its cash limit at 100,000 euros ($135,000) and Barclays Plc capped cash bonuses at 65,000 pounds ($103,000) as lenders pushed more pay into the future to bring down compensation costs and satisfy regulators’ calls for long-term incentives.
“The increased use of deferred compensation should create a pipeline of bonuses that will be paid in future years, which will reduce volatility in industry tax payments,” DiNapoli said.
While Wall Street chief executives, such as Lloyd Blankfein of Goldman Sachs and JPMorgan Chase & Co’s Jamie Dimon, have predicted that the slump in investment banking and trading is temporary, DiNapoli said profits won’t return to those of the boom years “any time soon.”
During the financial crisis, the industry lost 28,000 jobs, the comptroller said. Before staff cuts resumed in April, Wall Street had recovered 9,600.
“Maybe we’ll never go back to the kind of profits we had a couple of years ago,” DiNapoli said in the interview. “If the tradeoff is that we don’t have the kind of valley we had in ’08 and ’09, I think that’s a good tradeoff for everyone.”
Business and personal income-tax collections from the financial industry accounted for as much as 20 percent of New York state tax revenue before the start of the financial crisis in 2008, DiNapoli said. The contribution declined to 14 percent last year. New York City’s tax collections from Wall Street have fallen to less than 7 percent of revenue from 13 percent, he said.
The city’s budget projections are consistent with DiNapoli’s bonus forecast, he said. The state, though, predicted a bigger drop, “meaning revenue may be slightly higher than anticipated in the last quarter of the current state fiscal year,” DiNapoli said.