Why Bonuses Will Drop (Further) With Banking Changes...

The link breaks, so here is the text:

Goldman and Morgan trade profits for safety
Bronze Age set to replace gilded era in New York City as investment firms chop bonuses and move under more restrictive regulation of the Federal Reserve as banks.

Print Email Add a comment Aaron Elstein Buck Ennis Related Stories
» New York City cuts off short sellers

More Banking Headlines
» Nomura buys Lehman’s Asia units for $225M
» Morgan Stanley to sell 20% stake in itself
» Wall St. shakeup leaves big banks ahead

ALSO: Charities brace for Wall St. fallout

Filed Under: Banking Goldman Sachs Morgan Stanley Wall Street
With the last two independent investment banks—Goldman Sachs Group Inc. and Morgan Stanley—having now embraced a future that assures they will become more risk-averse and less profitable—a new bronze age is about to descend on New York City, replacing the gilded era that is now history.

Last year, Wall Street firms showered $33 billion in bonuses on its New York-based employees alone, according to the state comptroller’s office, or an average of $180,420 per fortunate person.

This year’s payout will be downright puny by historical standards.

The changes at Goldman and Morgan start with the firms agreeing to become banking companies supervised by a host of new regulators, including the Federal Reserve, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. Their new regulatory status will allow the firms to accept customer deposits, a much steadier source of funding than the short-term loans on which brokerage firms typically rely.

Morgan Stanley lurched aggressively in that direction Monday morning by agreeing to sell a 20% stake in itself to Japan’s Mitsubishi UFJ Financial Group at an undisclosed price. Reflecting the new era, Morgan Stanley pointed out in the first sentence of its press release announcing the deal that its new partner has $1.1 trillion in deposits. Its shares were up just over 2.3% on the news, while Goldman Sachs’ shares fell 4.3%.

The rub is that in their new guise brokers will get regular exams from their new supervisors to ensure their deposits are being used in a safe and sound manner. That means the days of these firms using enormous leverage—playing with vast amounts of borrowed money to boost their profits—have come to an abrupt end.

Morgan Stanley, for example, had assets on its book equal to 23 times its capital at the end of last quarter. It will soon be required to have approximately half that level, if the leverage ratios at J.P. Morgan Chase & Co. or Bank of America are any guide. In real-world terms, that means the brokerage firms will be more restricted in their ability to lend money to clients seeking financing for leveraged-buyouts. They will also probably have to cut back in trading securities for their own account, a vital source of profit in recent years.

Banc of America Securities analyst Michael Hecht estimated in a report Monday that Goldman and Morgan could see their return on equity decline by 40%. Return on equity measures how profitably companies deploy their capital.

“The path back to growth could be a long, hard trek,” wrote James Picerno, editor of The Capital Spectator blog. “Recovery will take longer than many think. Indeed, the addict has only just come to the conclusion that he has a problem. Several years of group therapy are coming, and it’s only just begun.”

For the city and state, which have long relied on the Wall Street for a big slug of taxes, new sources of revenue will have to be found while the shattered brokerage industry tries to repair itself by adopting the business model embraced by commercial banks like J.P. Morgan Chase or Bank of America.

“Deposit-taking entities, as Goldman Sachs and Morgan Stanley realized in the late innings of this ordeal, are in the driver’s seat,” observed CreditSights analyst David Hendler in a research report on Monday.

Filed Under: Banking Goldman Sachs Morgan Stanley Wall Street

(bump)

surprised no response on this... a number of folks said that bonuses would not be affected, I'm wondering if this changes their minds...

OMG, you are so EddieWilson. This is exactly what he used to do, make a post, follow up in case no one responded, and then do it again to chide everyone else for not caring about his "news."

EddieWilson was the best at having a conversation with himself.

It's like everyone was born yesterday. The financial sector accounts for only 15 to 20% of the buyers in the market, the New York Times is quoting a broker in that article. Quoting a broker is the same as quoting a serial liar. Goldman and Morgan are morphing in to more stable and what will ultimately become much larger entities. After the smoke from this crisis blows over, they will ask the government if they can perform more like investment banks, and the government will allow them to do so. As long as they are able to borrow short term from the Federal Reserve, their loan to asset ratios will be in line. This all happened already. In the 80s, the S & L scandal cost 160 Billion dollars for the government bailout and 80s de-regulation came to an end. We now have an index 6 times greater than what it was back then. The government will definitely do the bailout and they'll do it until it works. Would Buffett be sinking 5 Billion dollars into an entity that's about to wipe out, I don't think so. In order to see the forest, you must see beyond the wood of just one tree.

TS234, I think you are talking about a turn around that will happen after a few years, if not more. (I generally agree with your positive take on the hypersensitivity of the economic situation.)

I think many can grasp on the idea that 15% less buyers doesn't mean the ruins of NYC RE in the long term (5+ years), but for people who are thinking of selling or buying... its a either a bummer or a great buying opportunity as 15% less buyers only amplifies the downward pressures of prices (supply and demand) until the NYC RE market (let alone the economy) becomes stables.

T5234 - "After the smoke from this crisis blows over, they will ask the government if they can perform more like investment banks, and the government will allow them to do so."

Or invent some complex way around the commercial bank rules. Establish a subsidiary. Morph the subsidiary. Merge it into another entity. Spin off the merged/morphed/new subsidiary/affiliate. Hire a large Manhattan corporate law firm to be sure no one can ever follow it. If that fails, hire a Houston law firm.

To all those who told me that the change from an investment bank to a commercial bank would make no difference for MS GLD in terms of bonuses, read the article closely. Not only are their capital requirements to meet, there are counterparty risk requirements that prevent the parent firm from lending too much to the subsidiary. Firewall provisions, as well as a whole new set of regulators.

That MS and GLD will wind up as larger institutions is debatable, but that they will take on less risk is not. That LEH, BSC, MER, AIG, Fanny, Freddie, and soon WaMu are gone, is also not.

"they will ask the government if they can perform more like investment banks, and the government will allow them to do so."

Wrong. Investment banks are regulated by the SEC; commercial banks are regulated by the Fed, the Comptroller, FDIC / FSLIC, and states. They are not so nice.

"As long as they are able to borrow short term from the Federal Reserve, their loan to asset ratios will be in line."

To do that they will have to meet the capital requirements of commercial banks. Sorry to burst your bubble.

TS234- "Would Buffett be sinking 5 Billion dollars into an entity that's about to wipe out, I don't think so. In order to see the forest, you must see beyond the wood of just one tree."

I agree 100%. Another who who can see between the lines. Here is a what if TS. How will the fact that Buffet is backing Obama play to republicans voting on this bailout? Just some thing to think about. I see a bailout, however there will stuff attached that could dilute the plan.

I think Buffett gets that the government will backstop this thing, and all the posturing in congress is just posturing. No one wants to be the one who voted against the measure that "would have saved us"... They just want to show that they had "issues" with it so they are covered as we go through the shakeout...

And, once that is locked it, you have to figure Goldman is in the lead for recovery... they had the fewest issues of all the banks (and, in fact, bet against the mortgage market in many cases) and should be able to find some ways to make money faster than the others.

DCO-Goldman is in the lead for recovery and a guy like Buffet knows this. I think McCain blew it the day after the Lehman implosion. He said "we need to form a 9-11 commission to investigate", I think that will cost him. Obama was all over it and as soon as the smoke clears from this mess, I'm sure the Obama camp will be featuring him as the same old, same old in their ads, and now he's backed out of Fridays debate. I think the upheaval we're living in is going to affect the election seriously and the old guy reading notes is even going to turn some republicans off. I can't believe how mercilessly everyone in politics is spinning this, and it's going to backfire on someone, the question is who.

Buffet is the example of new capitalism for the XXI century. He doesn't support the party of the club of millionaires, and chooses a young, smart black guy for president. His chess moves have a political side. He has done with GS is part business, part message of confidence in the market to lift up the hopes. He and Bill Gates are tremendously generous with charities. I hope people realizes that game is over for the old capitalism. Europe has a lesson to teach regarding health care and education that USA didn't want to hear while thousands were getting thousands of millions. Time has come.

What I love is the fact that one of the issues being debated in regards to this bailout is not using taxpayer money to be used for outgoing executive payouts. How is that even debatable? These greedy myopic fucks failed when they got us into this mess and should consider their fat bonus this year is serving no time. They failed. Who could argue that they should get paid. This attitude of entitlement is appalling.

Saw on in the papers this am... either the post or the news did a piece on how commercial structure is going to take down bonuses. Anyone catch that? Didn't find the article online yet.

"This attitude of entitlement is appalling." Yep. "It's okay for ***US*** to be entitled, because ***WE*** are superior." Describes much of prime Manhattan, by the way.

we're not superior?