Sunday, December 17, 2006
Christmas came a week early to Wall Street, as stocks hit new highs, investment banks closed their books on a banner year and record bonuses were handed out.
John Mack, who returned to run Morgan Stanley after a messy power struggle in 2005, will take home a bonus of more than $40 million this year, almost all of it in the form on stock and stock options. That follows the $39 million he received last year, including his $26 million signing bonus. Eat your heart out, Derek Jeter.
But Mack's haul is almost surely to be exceeded by that of Lloyd Blankfein, the new chief executive of Goldman Sachs. His pay package is expected to top $50 million.
The reason is simple: another record year for Goldman, capped off by a record fourth quarter, with profit of $9.5 billion on revenue net of interest expense of $37.7 billion. Goldman's fourth-quarter profit alone was a record for any Wall Street firm, up 93 percent over the same quarter in 2005, which was itself a record. All in all, the firm's total compensation pool for the year exceeded $16 billion, or an average of $623,000 per employee.
That average, of course, masks a wide range. While even first-year associates at Goldman now start out with six-figure pay packages, managing directors and top investment bankers can pull in as much as $25 million in a good year like this one. And there are hot traders who can expect $50 million this year. The laggards in 2006 are likely to be the hedge fund managers, many of whom have seen the values of their portfolios drop this year. But don't worry about them: Even the fee income is enough to cover that Christmas week in Aspen.
While Goldman certainly led the pack this year, the results posted by other Wall Street firms weren't too shabby either. Quarterly profit of Lehman Brothers rose by 22 percent, and of Bear Stearns by 38 percent.
Driving these results has been another record year for merger and acquisition activity, increased trading volume, up markets in both stocks and bonds, and a willingness of the firms to put more of their own capital at risk. How long the party will last is anyone's guess, but at this point investors are inclined to join in the good cheer. The Dow Jones industrials reached another record and the S&P 500 reached levels not seen since the fall of 2000.
Still, news of Wall Street's Very, Very Good Year is likely to stir some resentment on Main Street -- not because the economy is so bad as much as it is yet another reminder of the ever-widening gap between the super-rich and everyone else. Are those pay packages really a reflection of the Wall Streeters' superior skill, training and ingenuity? Or are they a reflection of the lack of price competition in an industry that is allowed to earn monopoly-like fees and profit? Or could it be that the new barons of finance are merely the beneficiaries of some old-fashioned dumb luck?