KEY POINTS:
Never in the history of Wall Street have so many earned so much in so little time.
Goldman Sachs Group, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns are about to reward their 173,000 employees with US$36 billion ($53.9 billion) of bonuses.
That's a 30 per cent increase from last year's record and it doesn't include the billions more that will be paid by Citigroup, Bank of America Corp and JPMorgan Chase, the three largest US banks, as well as the hundreds of hedge funds and private-equity firms that constitute the financial industry.
Enriched by the unprecedented value of takeovers, equity trading and credit derivatives, "this year will be the best ever for the major brokerage firms", said Brad Hintz, an analyst at Sanford C. Bernstein in New York.
The average windfall for each individual at the five largest US securities firms will be enough to buy a US$165,000 Bentley Continental GT, the two-door coupe favoured by Paris Hilton and Cher.
They'll have plenty of change for a box of Romeo y Julieta cigars and a case of Pol Roger champagne - the stuff enjoyed by Winston Churchill, Britain's prime minister in the 1940s and 1950s.
Credit-default swap specialists, who speculate on companies' ability to repay debt by trading financial instruments based on bonds and loans, won't be the only winners this year.
New York City cut the estimate for its budget deficit by 87 per cent last week, in part because of the investment banks' better-than-expected earnings. The state comptroller's office said tax receipts from the financial industry's wages would rise 14 per cent to US$2.4 billion this year.
Dolly Lenz, Manhattan's doyenne of high-end properties, is timing some of her best listings to coincide with bonus season.
Since the 1970s, the UJA-Federation of New York has held its annual bankers' fundraiser on the first Wednesday in December, a date chosen because it was when Bear Stearns told workers what their bonuses would be.
"When Wall Street does well, we do well," said Richard Koppelman, owner of Miller Motorcars in Connecticut.
Koppelman is readying a US$150,000 red 2005 Ferrari 360 Modena F1 convertible for a customer who will be getting his first bonus since graduating from business school two years ago.
London's investment bankers, traders and hedge fund managers will get £8.8 billion ($25 billion) in bonuses this year, up 18 per cent from last year, the city's Centre for Economics and Business Research predicts.
"We estimate that about 50 per cent or more will end up in property, driving up property markets," said Jonathan Said, senior economist at the CEBR.
"There is also a multiplier effect trickling down to the construction companies, and people spend more on luxury goods, eating out and holidays."
Conditions for money-making worldwide are some of the best ever. The global economy is in its fourth straight year of growth of more than 4 per cent, stock indexes in the US, Hong Kong, Canada, Mexico, Spain and Brazil are at or near records, and corporate debt defaults are at historic lows.
Leveraged-buyout firms attracted more than US$170 billion of new money this year, helping to drive US$2.9 trillion in takeovers and a surge in loans, data compiled by Bloomberg and London-based Private Equity Intelligence show.
More than US$110 billion poured into hedge funds in the first nine months, beating the last annual peak in 2002 and fuelling demand for stocks, bonds, commodities and derivatives, which are used to hedge risks and for speculation, and can be linked to specific events such as changes in the weather or interest rates.
Securities firms took bigger risks of their own on trading bets and private investments. Goldman and Merrill reaped gains from stakes in companies such as Industrial & Commercial Bank of China and Hertz Global Holdings of Park Ridge, New Jersey.
Combined, Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns earned US$21.3 billion in the first nine months, surpassing the full-year record of US$20.4 billion last year.
Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns are representative of Wall Street's largesse because they account for more than two-thirds of its capital, data compiled by the Securities Industry Association show.
They'll report US$128 billion of combined revenue this year, the average estimates of analysts surveyed by Thomson Financial show.
The five firms set aside 40 per cent to 50 per cent of revenue to pay compensation and benefits. Each holds back about 60 per cent of that amount for year-end bonuses, said Hintz, who previously was chief financial officer at Lehman and treasurer at Morgan Stanley.
Boutique banks such as Lazard distribute an even larger share of revenue to employees.
This year's median bonus will exceed US$200,000. That's more than the US$177,852 the US Army pays a four-star general with at least 26 years' experience to serve in Iraq or Afghanistan, including allowances for family separation, hazardous duty and imminent danger.
While public opposition to the Iraqi occupation weighs on US politics, war doesn't cast a pall over Wall Street the way it once did.
In 1940, when Churchill declared, "Never in the field of human conflict was so much owed by so many to so few," to describe his country's debt of gratitude to the airmen who fought in the Battle of Britain, the Dow Jones Industrial Average fell 13 per cent. This year, the Dow average is up 12 per cent and it has gained 45 per cent since the US and Britain invaded Iraq in 2003.
"Unless the price of oil gets mixed in here, I think they're just operating on totally different spheres," said Charles Geisst, professor of economics and finance at Manhattan College and the author of 100 Years of Wall Street, published by McGraw-Hill in 1999.
"This is the sort of investment-banking market you expect in a strong peacetime boom."
The biggest bonuses, some exceeding US$40 million, will go to traders who risk the firms' own capital on everything from crude oil to credit-default swaps, structured-finance specialists who package undesirable loans into hot-selling bonds and bankers who advise buyout firms.
Payouts for top performers in London will be up at least 25 per cent from last year, says Aidan Kennedy, a partner in the financial-services practice at Christian & Timbers, a recruiter in the city.
Nowhere will the bonanza be bigger than at New York-based Goldman, which is set to report an industry record of US$8.43 billion in profit, up 50 per cent from last year.
At Goldman, total pay will average US$659,000 an employee, based on analysts' estimates for US$35.7 billion in revenue, the firm's average compensation ratio of 47.4 per cent for the past five years and a payroll of 25,647 at the end of the third quarter. That includes an average bonus of about US$398,000.
"You pay what one has to pay in order to attract the best and the brightest," said former Citigroup chairman Sanford Weill.
Goldman's principal-investments unit, led by Richard Friedman, 48, invests money on behalf of the firm and its employees. It may be among the biggest beneficiaries of this year's bonuses, said Whitney Group's Goldstein.
Goldman's trading division is another likely winner. It produced US$17 billion of revenue in the first three quarters of this year, up 58 per cent from US$11 billion a year earlier.
The division's three co-heads, Michael Sherwood, 41, based in London; J. Michael Evans, 49, in Hong Kong; and Thomas Montag, 49, notched a 50 per cent increase in revenue from equity trading and 63 per cent gain in fixed income.
Montag is moving to New York from Tokyo to become head of trading in the US. He'll succeed Gary Cohn, 46, who became Goldman's co-president with Jon Winkelried, 47, in June.
"If you're a top trader at Goldman Sachs, and you're not getting paid, you're going to go start your own firm," said Kyle Cerminara, a financial services analyst at Baltimore-based T.
At Zurich's UBS AG, Europe's biggest bank by assets, Chief Financial Officer Clive Standish said bonuses will increase more for bankers who arrange mergers and acquisitions, while fixed-income traders will "find themselves flat on the year".
After three years in the shadow of trading, M&A, the business with the fattest profit margins in the industry, is at record levels for the first time since 2000.
Surge in M&A UBS's revenue from fixed-income trading rose 16 per cent in the first nine months to 6.45 billion Swiss francs ($7.7 billion). The bank has arranged US$401 billion of takeovers completed this year, up from US$226 billion at the same point last year and increased its market share in M&A to 19 per cent from 13 per cent.
"Compensation in this business follows revenues and performance," Citigroup Chief Financial Officer Sallie Krawcheck said. "It's very simple that way."
Still, no one in the industry is suffering. At US$36 billion, the bonus payouts from the five biggest securities firms alone will top the annual budget of the National Institutes of Health, the US medical-research agency, and approach the $42.7 billion of funding the Department of Homeland Security requested for next year.
The United Nations World Food Programme budgeted about US$3.5 billion this year to feed 79 million people in the world's poorest countries.
Few charities miss the opportunity to remind traders and bankers that bonus season is a time to give. The UJA-Federation, a Jewish philanthropy, is holding its annual benefit for about 1400 guests next month.
This year, the organisation aims to raise at least US$21.9 million, up from last year's record US$20.4 million, said Joy Prevor, an associate executive director. She said: "It's really the climax of our campaign because it follows bonuses."
- BLOOMBERG
