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Bonuses on Wall Street are expected to soar this year according to
two reports released this week. These bonuses make up the bulk of compensation
for top executives and managers of banks and brokerages and are rising as a
result of frenzied activity in the hedge funds and mergers and acquisitions
markets, as well as sharp increases in energy prices.
An article in the Wall Street Journal on November 8 reported that Wall Street
executives are expecting a “bonus bonanza” this year. According
to the Journal, citing data from a report to be released by the executive search
firm Options Group, compensation is expected to increase by 20 percent, with
some bankers and traders expecting even higher windfalls.
The Journal reported, “Investment bankers, who arrange mergers and stock
offerings for corporations... are expected to be among the Street’s biggest
winners this year, with compensation rising 20% to 25% on average, according
to the study. For an investment banker at the managing director level, a senior
post on Wall Street, that will translate into an average pay package of between
$2.2 million to $3.3 million this year. A global head of investment banking
could pull in on average anywhere between $7 million and $10 million.”
Fueled by a surfeit of cash in corporate coffers and relatively low interest
rates worldwide, global merger and acquisition volume surged to $2.3 trillion
by the beginning of November. This is the most active merger and acquisition
market since 2000, at the peak of the US stock market bubble when such activity
reached record highs. Mergers and acquisitions are often accompanied by cuts
in labor costs, including layoffs, for which executives reward themselves as
well as their advisors and bankers on Wall Street.
Another factor behind the surge in Wall Street bonuses is the sharp increase
in energy prices, which has hurt consumers but has translated into gains for
commodity traders as well as the energy companies themselves. The Journal reported
that bonuses for commodity traders could increase by an average of 30 percent
over 2004. It quotes Options Group co-founder Michael Karp as noting, “There
was lots of volatility in this area and a lot of people made a lot of money
here.”
Citing a report put out by Johnson Associates Inc., a compensation consulting
firm, the New York Times reported November 8 a somewhat lower increase for investment
bankers, of between 10 and 20 percent.
The Times noted, however, “The big winners could be traders involved
in commodities and energy, in particular, proprietary traders who deal in those
two high-octane growth areas. They could receive pay increases of 40 percent
to 50 percent,” the newspaper wrote, “with some walking away with
$15 million to $20 million each, according to one investment banking executive
who is prohibited by his firm from commenting on compensation issues.”
Big gains are also expected among those who are engaged in the booming hedge
fund trading sector. Hedge funds have become a principal tool for wealthy investors,
with assets of about $1 trillion. The funds have seen increases in asset value
of about 17 percent annually in recent years. They are a highly speculative
branch of the securities trading market, usually employing computer models to
extract profits from temporary fluctuations in the stock and derivatives markets.
The Times quotes Guy Moszkowski, a securities industry analyst at Merrill Lynch,
as noting that for four of the top firms—Goldman Sachs, Lehman Brothers,
Bear Stearns and Morgan Stanley—“compensation should be a record
at $32 billion in 2005 versus $24.7 billion in 2000.” These firms are
involved in many of the different activities that have been especially lucrative
over the past year.
Living standards for a tiny section comprising the Wall Street elite are booming.
Julian Niccolini, managing partner of the Four Season’s Restaurant in
New York, explained to the Journal the impact of the Wall Street bonanza from
his own perspective: “It’s white-truffle season and people are paying
as much as $180 for a main course. The economy seems to be going in the right
direction and I think this is the most money people have ever had.”
Well, the most money that some people have ever had. Indeed compensation on
Wall Street has seen a substantial recovery since declines in 2001 and 2002,
though average compensation has not yet reached the peaks of the stock market
boom of the late 1990s and 2000. However, the much-touted economic recovery
of the past two years has not led to gains for the broad majority of the population.
There has been no substantial improvement in the jobs market over the past
two years. The remaining sectors of the economy that have had relatively high-paying
and secure jobs—such as the auto and the airline industries—are
seeing a sustained assault on wages and benefits.
According to a US Census Bureau report released on August 30, the number of
Americans living in poverty increased in 2004 by 1.1 million. The poverty rate,
now 12.7 percent of the population (37 million people), has increased for four
consecutive years from 2000 to 2004. Even this figure understates the level
of poverty in the US, as the official poverty level is much lower than the income
required to meet basic needs.
Other figures also document the precarious financial position of growing
number of Americans: rising debt levels, persistent unemployment and underemployment,
rising requests for emergency food assistance and increased homelessness.
Real income has declined over the past year for most workers, who have
seen stagnating or declining nominal wages together with a sharp growth in consumer
prices, especially for energy. The situation is expected to get much worse as
the winter months produce home heating bills that are up to 50 percent more
than the already steep prices of last year.
The huge profits reported by energy companies in the past quarter—including
a record $9.9 billion pulled in by ExxonMobil alone—have come directly
out of the pockets of ordinary consumers who have faced mounting prices for
gasoline and natural gas.