Home » Wall Street and the Making of the Subprime Disaster

Big Five Banks Prepare for Record Bonuses Despite Failures

Though Wall Street bonuses are projected to be somewhat lower overall, bankers at the big five banks will take home even more this year – a combined $38 billion.

Strong revenues in the first half of the year, combined with Goldman Sachs’ record-setting revenues, will lift bonuses at the big five investment banks to a combined $38 billion this year, $2 billion more than last year. This is happening despite massive writedowns from four of these banks – Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns. Even the CEOs that have lost their jobs as a result of the subprime meltdown made off with tens of millions in compensation. Traders who worked with subprime-related securities will earn less this year, and Wall Street bonuses are projected to be somewhat lower on average, but all in all, bankers are not taking the subprime hit that investors and homeowners are experiencing.

A. THE TOP FIVE INVESTMENT BANKS WILL PAY OUT A RECORD $38 BILLION IN BONUSES

Investment banks have yet to announce their bonus payouts yet, and will not cut bonus checks until next year, but Bloomberg has estimated that the top five investment banks will pay out $38 billion in bonuses this year – even more than last year.[1] This amounts to an average bonus of $201,500 per employee.

The banks’ bonus pools are reportedly large, despite multi-billion dollar losses in the subprime market, because revenues were strong through the first half of 2007, and because Goldman Sachs will make a record payout, even more than the $16.9 billion in compensation that it paid last year. The top three executives at Goldman are expected to collect a combined $200 million in bonus money.

Aside from the top five banks, however, bonuses are not expected to reach record levels on Wall Street. Some experts are projecting a 15% drop, while others say bonus levels will be relatively flat.

Bond traders – referred to by one New York Times article as the "Kings of Wall Street” over the past six years – will see their bonuses slashed 5-15%.[2] That may not be the case at Goldman Sachs, however, since traders at the firm reportedly managed to adequately hedge against losses in the subprime sector.

But where bond revenues and bonuses leave off, other revenues and bonuses will pick up. According to estimates from Johnson & Associates, a compensation consulting firm, some bankers will make more:

  • Investment bankers – those who underwrite offerings and put together mergers and acquisitions – are expected to take home 10-20% more.[3]
  • Equities traders are expected to take home 5% more.
  • Equities derivatives traders are slated to take home 15% more.

B. CEOs GET AXED, BUT STILL TAKE HOME MILLIONS

CEOs at Merrill Lynch and Citigroup have lost their jobs because of the subprime-related writedowns at those banks, but both are taking home sizable pay packages:

  • Citigroup CEO Chuck Prince is taking home $42 million in stock, bonus, and other benefits, plus the $53 million in stock that he already held. Prince resigned after board pressure begin to build against him due to large writedowns related to subprime mortgage-related securities holdings.[4]

  • Merrill Lynch CEO Stanley O’Neal left the firm with a reported $161 million severance package.[5] O’Neal was forced to resign after the firm reported an $8.4 billion subprime-related writedown. O’Neal’s replacement, John Thain, will receive an initial pay package of $50 million.

Footnotes

[1] Christine Harper, "Wall Street Plans $38 Billion of Bonuses as Shareholders Lose,” Bloomberg, November 19, 2007.

[2] Jenny Anderson, "Bonuses Likely to Shrink For Many On Wall Street,” The New York Times, November 7, 2007.

[3] Ibid.

[4] "Chuck Prince to get $42M on Exit,” Associated Press, November 8, 2007.

[5] "Thain’s $50 million Cleanup Job,” New York Times Dealbook, November 19, 2007.