Buttonwood
A sober new yearJan 3rd 2006 | NEW YORK
From The Economist Global Agenda
SourceThe bonus season on Wall Street is big but quietAS 2005 ended, it did not appear to be a particularly good year in America’s financial markets. Returns on equities were modest, returns on debt (broadly measured) almost negligible. For people working in the investment business, it has been quite another story. The American economy was strong and its companies hugely profitable; and the benefits from both were magnified in the results of financial firms and their most fortunate employees. In the fourth quarter of last year compensation costs at Goldman Sachs rose by 52%, compared with 2004, at Morgan Stanley by 45% and at Lehman Brothers by 28%, according to an analyst at Merrill Lynch. Bonuses, often the biggest component of compensation, were announced over the holidays and have been huge. But unlike the last time things were this good, at the end of the last decade, the celebrations have either been tiny or very private.
Before providing a rationale for this, Buttonwood would like to be frank about his disappointment. If the rest of the world cannot receive the outsized earnings received by a lucky few, it should at least have enough examples of grossly conspicuous consumption to be either inspired or self-righteously disgusted. This was so in the late 1990s, when work was supposed to be fun and the most successful investment banks constantly worried that all their employees, from the mailroom up, might depart at any moment for even more lucrative careers tied to the internet and thus should be lavishly coddled and rewarded.
Certainly, the fact that the 1990s turned out to be a gigantic fraud contributed to a new Zeitgeist on Wall Street. No one is quite so insanely optimistic any more, which inevitably puts a pale on revelry, and there is no longer much interest in indiscriminate coddling. If Goldman Sachs is any example, the biggest returns, in not only absolute but also percentage terms, float towards the top. Just before the Christmas holiday, filings showed that Hank Paulson, Goldman’s chief executive, received what is likely to be the Street’s largest disclosed pay packet: a $37.4m bonus atop a $600,000 salary. That is up from total compensation of $30m last year. This may, if anything, underestimate the true divergence between winners and losers. At the same time as bonuses are distributed, Wall Street firms have made it a habit of notifying several per cent of their staff that they should pursue other careers. As anyone with a shred of perspective has come to learn, this year’s lavishly rewarded star might be part of next year’s purge. Who can celebrate that?
There are sound political reasons to be more restrained as well. The various investigations into Wall Street may not have revealed many crimes, but they have shown how easily prosecutors can be roused when investors are feeling aggrieved. Evidence of lavish spending played a large role in the prosecution of Dennis Kozlowski, the former chief executive of Tyco. Presidential campaigns (albeit unsuccessful ones) have been based on demonising the rich. An executive arriving to work today at a top investment bank in a Rolls Royce, Bentley or Ferrari would risk being fired (these ought to be kept at second homes). The role model at the moment for visible spending in New York is the city’s mayor, Michael Bloomberg, a former trader who earned a fortune providing financial information. In the past year he spent almost $100m of his own money to win the thankless (and unpaid) job of trying to keep an ongoing municipal disaster from toppling over. His name routinely pops up as a huge contributor to innumerable charities and there is a pervasive assumption that he makes huge anonymous contributions as well. He dresses in nondescript suits, fiercely resists efforts of the press to pry into his private life, and comes off as serious and effective rather than flashy. While it is highly unlikely that a similarly driven person will succeed him, his tenure has almost four years to go.
People are, of course, spending their bonuses, but often in ways that are hard to see. It may have never been more difficult to find a contractor to do a renovation in New York or to get a child into a private school. Dolly Lenz, an estate agent at Prudential Douglas Elliman, says the evidence that bonuses would be strong this year emerged as early as November. Notwithstanding some evidence of a slowing housing market, every beachfront property in the Hamptons was scooped up by Christmas, whereas the buying season usually starts in February. In the past five weeks, five apartments were put up for sale in a sought-after building across from the Metropolitan Museum of Art. Three are already gone, each for between $15m and $20m.
Across from where our namesake buttonwood tree once stood on Wall Street, a building that once served as Citibank’s headquarters has been converted into apartments. It has attracted “baby bankers”, meaning those in their twenties and thirties, who have been scooping up small but elegant apartments, costing between $900,000 (for a studio) and $5m (for a three bedroom), says Ms Lenz. Older clients, she adds, are now in their early forties, a sharp drop from just a few years ago.
The shift in age no doubt reflects another change: most of the beneficiaries of the current boom are not the same people as those who prospered during the last boom. In short order, observes Charles Bralver, a consultant at Mercer Oliver Wyman, the investment banks and the markets have transformed how they make money, from equity underwriting to the more speculative corners of the debt market, derivatives, and servicing hedge funds and private-equity firms.
And that may be the final reason why the celebrations may be modest. Any business that could change so quickly in the past can easily change again. Perhaps this year’s beneficiaries are, quite reasonably, saving while they can. How dull. How clever.
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