Hell to pay

Wall Street bankers, banged up by credit losses and slowing business, now face the scariest kind of markdowns: lower annual bonuses.

Unless market conditions rebound soon, "it's going to be an old-fashioned terrible compensation year", says Alan Johnson, whose Johnson Associates advises Wall Street banks on pay and bonuses.

Johnson says he expects 2008 bonuses to fall 30 percent from 2007 levels, which at most banks were down from 2006. Annual bonuses track revenue, which is expected to plunge from the levels seen in the boom years.

That's if Wall Street employees still have a job. US brokers have fired more than 30,000 workers in the past year as broken-down markets for buyout financing, mortgages and other debt generate severe losses and sap revenue.

And more job cuts are expected, as the credit storm over Wall Street grows worse, as evidenced by the near collapse of Bear Stearns Cos last week and troubles at a number of investment funds.

"It will be one of the worst years in a long time," says recruiter Joseph McCann of JH McCann & Co. Last year was tough and 2008 should be even tougher."

Flagging revenue is increasing pressure on firms to cut payroll. Johnson predicts banks on average will slash headcount by 15 percent this year from 2007, while other headhunters warn of 20 percent cuts.

New York City's independent budget office predict 20,000 financial services jobs in the area would be lost over the next two years. US securities industry employment peaked at 849,900 in August, government data shows.

Those cuts would follow significant reductions in the first two months of this year: US financial services companies cut more than 20,000 jobs, Challenger, Gray and Christmas says.

"A lot of people are going to be let go," Johnson says. "It's going to be really tough. You have a normal cyclical downturn and then put a credit crunch on top of that."

In the past month, Lehman Brothers laid off 5 percent of its employees, or 1,400 people, while Citigroup says it would cut 2,000 banking and trading jobs. In January, Goldman fired about 5 percent of its global work force, or 1,500 people.

Bear Stearns alone could flood the unemployment rolls, as JPMorgan is expected to slash a third or even half of the smaller bank's 14,000 employees following its takeover.

Meanwhile, first-quarter results fell by half at Goldman, Morgan and Lehman, reflecting losses on assets as well as a slowdown in investment banking. The outlook for the rest of the year offers little sign for encouragement, as analysts slash profit forecasts.

Bonuses, meanwhile, will include a higher portion of restricted stock and awards linked to improved results three to five years out. These measures let banks defer cash expenses in hopes revenue growth will pick up.

McCann noted firms are tying up bankers with long-term stock grants that require staffers to remain for five years. Banks are also dispersing cash linked to a note; if people quit before a certain period, they have to pay the money back.

Bankers and traders, of course, will feel pressure to agree to these terms as the job market gets tougher.

"With all these people being fired, it just drives bonuses down," McCann says.

Some headhunters contend that Wall Street firms have been restrained with their cuts, concentrating on mortgage and corporate lending or trimming at edges. Banks, recalling the drastic cuts after the tech bubble burst in 2000, are wary of cutting too deeply and missing out on the next recovery.

Yet Johnson says banks cannot avoid cutting core advisory, investment and trading jobs much longer.

"You've got the cyclical downturn. That's going to have an impact on M&A, investment banking, hedge funds, private equity and asset management," Johnson says.

Wall Street's credit losses are far from over, too. Goldman analysts forecast financial institution worldwide have written off $175 billion since the credit crisis began, out of what they predict could be $460 billion of losses.

That said, Wall Street's pain could lead to gains for hedge funds, restructuring advisers and investment firms springing up to take advantage of the large labor supply in these distressed markets. These businesses have been aggressive recruiters in recent months.

"For some of these guys, this is their day in the sun," Johnson says.

Agencies

(China Daily 03/31/2008 page11)