Looking Ahead to 2012's Wall Street Bonus Season
A: It seems that the worries of a few years ago regarding the effect of a changing wall street and future regulation post credit crisis are starting to happen now. All those wall street jobs associated with investment banking divisions tied to the mortgage securitization 'profit machine' are severely pressured. Now more than ever wall streeters have to worry about what they are bringing to the table for the firm. As for those holding deferred stock that vests soon or over the next year, ouch! Take a look at the stocks of these banks and IBs and its the markets' equivalent of a clawback on past deferred bonuses tied to stock. I'm starting to hear about continued less cash and more deferred options for awarded bonuses and that the always desired longevity bonus is not a guarantee for this year. Lets discuss.
Make no mistake about it, fixed income bankers will see the worst of the bonus cuts/layoffs this year. All those sectors of wall street that should never have existed but did because of the housing/credit bubble, are under serious pressure to perform. And if they dont perform, headcount is reduced. Thats the reality on wall street post crisis.
Meanwhile, those that are producing are seeing higher base salaries and lower cash bonuses. If 2010 was about 2/3 cash and 1/3 deferred with potential for longevity bonus, 2011 looks to be about 1/3 cash and 2/3 deferred w/out the longevity bonus. These are the ramblings Im hearing about from my old wall street contacts; so Id love to hear from some wall streeters out there on what your hearing?
Here is the news so far on planned wall street layoffs:
Credit Suisse to axe 2,000...
UBS to layoff 3,500; 50% in investment banking...
Barclay's cuts 3,000 job...
Bank of America could cut up to 10,000; hit Merrill Lynch unit...
Goldman and Morgan Stanley announced cuts too, but nothing as drastic. And HSBC is looking to shed 30,000, but that is globally. Europe is seeing a bloodbath when it comes to investment banking layoffs and the lawsuits from housing agencies to big banking institutions for 'misrepresenting the risks" for 100s of billions of packaged asset backed securities (ABS), are just beginning to take their toll on the industry. Remember, when it comes to the banks its all about capital, leverage and liquidity and Europe's banking industry is under the heaviest pressure right now; dragging US banks down with it.
Back to our markets. Prior years bonuses that were tied to stock performance are getting the equivalent of a clawback right now with the recent pressure on bank shares. Think of all the deferred compensation tied to stock prices that are vesting now. Take one look at the XLF and its easy to see why what was awarded back in 2010 may not be worth as much as originally hoped today. Bank stocks are down between 10% and 40% from a year ago.
Bonuses are one variable in the ever complex equation of how wall street ultimately affects the Manhattan real estate markets. While the numbers may be down and the layoffs continuing, there are still plenty of high paying jobs and solid bonuses being handed out that will be used to buy property in this market. In my opinion, investor confidence tied to equity markets and volatility play a much bigger role when it comes to immediate impact on the Manhattan marketplace. As of now, we had plenty of volatility and a scare or two with equity markets around the globe; but nothing nearly as eventful as what we saw in late 2008 and into early 2009 causing a temporary 'disappearance of bids' for property. Put another way, if equities rally 10% from here by early 2012, it won't matter much if overall bonuses are down slightly from last year; the Manhattan market will continue to function. Time will tell.
As long as Gold is trading around $1,900/oz and 10YR US Treasuries are yielding below 2% all is not well, and I'll continue to be more concerned that the markets may have another round of fear/volatility left in them. It seems clear that its risk off right now and that US Treasuries are pricing in another wave of slowing global growth; its very likely we are in a recession right now that will be called later on by the NBER.
Personally, I rather the markets purge hard now and get it (bad debts exposed, over-levered under-capitalized banks/institutions fail) out of our system already so we can restructure and move past this debt deflationary episode faster and on better footing. Kicking the can down the road only prolongs this whole process. A fed engineered backstop and proactive reflationary policies to so called "calm" markets is not the making of a strong foundation for future economic growth and job creation. We still have some time and unintended consequences to deal with before we get through this cycle.
Until then, bonus talk is more of a media effect than anything. Instead, focus on credit, and equity markets (possible negative wealth effect of another equity selloff) and general confidence towards risk assets as more of a clue to how the Manhattan housing market might trend as this Euro-bank/debt situation plays out. How are buyers adjusting their bids in this changing environment? Are sellers hitting lower bids? It takes 4-6 months minimum to see the ultimate sales prices so lets keep our eyes on real time volume trends in the meantime.
Posted by Malcolm Carter
Mon Sep 5th, 2011 11:40 AM
Thanks for your characteristically perceptive views, Noah. My concern for the housing market is something you mentioned toward the end: Volatility. I believe that as long as we experience profound volatility, based more on fear than fundamentals, consumer confidence cannot recover. And without it, the housing market nationally and even here in Manhattan cannot regain its former health.
Posted by urbandigs
Mon Sep 5th, 2011 12:10 PM
I have to agree with you Malcolm..It would be interesting to see how current pace of demand would be doing if it was April or May, when the bumps came, rather than AUG which is historically very slow for us..So it leaves us wondering if the current dip down is seasonal or related to equity markets and volatility, or a bit of both. But now we have the tools to track it, so time will tell..Thx as always for the comment and hope your enjoying your long weekend!
Posted by urbandigs
Tue Sep 6th, 2011 08:17 AM
meanwhile, US Treasury yields now even lower..10yr at 1.9%, wow!
http://finance.yahoo.com/news/US-Treasury-10Year-Yield-bloomberg-4071061340.html?x=0&sec=topStories&pos=6&asset=&ccode=
Posted by ds
Tue Sep 6th, 2011 05:41 PM
Insightful as usual. I noticed sellers who bought in 2006-2007 (top of the market) trying to sell at higher prices and the seller broker saying that there isn't much room to negotiate. Seems like new developers and buyers at top of market is still trying to get top dollar... Are they right, market will continue to make new highs or will they take a bath when comps show they are way over priced?
Sincerely,
"Prospective Buyer"
Posted by Malcolm Carter
Tue Sep 6th, 2011 05:47 PM
Of course, sellers want to get top dollar, as you certainly know, Prospective Buyer. But they're still trying to come to grips with reality. In my experience, every property price is negotiable with rare exceptions today and always. As for the future, no one has a clear crystal ball. That said, in my view, prices won't be making new highs for some time given current economic realities at home and abroad.
Posted by urbandigs
Tue Sep 6th, 2011 06:02 PM
New highs, past 2007s contract signed peak and 2008s recorded median peak? Nah..But I do wonder what the final effect will be on median from the wave of action in the high end market from early to mid 2011, once those deals close and get counted. We know that sector popped, but did all the deals close yet and will they close for the Q3 report pushing up medians?
Malcolm's certainly right on the 'sellers trying to come to grips on reality' bit. That was my biggest challenge when I worked for sellers, was convincing them that their house is usually worth Y when they think its worth X and they own the thing and call the shots unless pressured by time to liquidate. I recall a few sellers on sales presentations telling me, "your either the most pessimistic agent I interviewed, or the most honest".
Which brings me to this question malcolm...from one agent to another, how often is the practice of over-estimating a potential sales price on a unit to get a listing, poisoning the minds of sellers into thinking that really is what their home is likely worth in todays market? I know many brokers will not take an overpriced listing, or will work out a deal to test a high price for X months, with the understanding of a reduction closer to the suggested level if no takers come. But where do these sellers get these price expectations from? SE? Stock markets? Renovations? Memories of their family in the house (sentimental value)? Outside sales from higher end comparables?
Would love to get thoughts on that