Wall Street's bonus anxiety

With Citigroup warning of $11 billion more in losses, the bonus outlook for many on Wall Street is getting dimmer as the year comes to a close.

By David Ellis, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Last year, the "it" purchases for Wall Streeters drowning in bonus loot included such luxuries as an exotic European sportscar or a tony pre-war apartment on Park Avenue.

But this time around, financial pros may have to settle for a pedestrian Mercedes and a loft rental in one of New York City's less-desired neighborhoods.

Big banks and brokerages are suffering enormous losses and face the possibility of additional writedowns in coming weeks. As a result, this year's bonus pool appears to be evaporating at a disturbing rate.

After warning late last month that Wall Street bonuses were likely to decline this year, the New York State Comptroller's office offered an even dimmer outlook this week, saying that bonuses are likely to shrink 10 percent from the record levels reached a year ago, when they hit $23.9 billion, or more than $136,000 per employee.

What has soured the outlook is more bad news from some of the biggest financial firms. One analyst that covers the sector warned last week that some of the banks hard hit by this summer's credit crisis such as Merrill Lynch (Charts, Fortune 500) and Bear Stearns will take a combined $10 billion hit during the fourth quarter. And on Sunday, Citigroup warned that it could take as much as $11 billion in writedowns in the coming quarter.

While bonuses tend to decline at a slower rate than profits, according to the New York State report, the bleak outlook does not bode well for those working on Wall Street, said Jim Stoeckmann, practice leader for compensation for WorldatWork, a nonprofit association of benefits and pay professionals.

"The bottom line is revenue and profits have some significant link to whether or not bonuses are paid out," said Stoeckmann.

The last two months of the year on Wall Street have typically been a time of anticipation, as traders and investment bankers start planning for how they would spend bonuses that in some cases totals more twice their yearly salary.

But this season is markedly different. Unlike previous years, many of the biggest Wall Street firms such as Citi (Charts, Fortune 500), Merrill Lynch (Charts, Fortune 500) and Bear Stearns (Charts, Fortune 500) have suffered billions of dollars of losses, following bad bets on mortgage securities. And now they stand to suffer even more in the fourth quarter and possibly in 2008.

Calls to Merrill Lynch and Bear Stearns about their bonus plans for this year were not immediately returned. Newly appointed Citigroup chairman Robert Rubin and interim CEO Sir Win Bischoff, while not addressing bonuses directly, attempted to sooth employees' anxiety after the company announced Charles Prince's departure and warned that more losses were to come. "We intend to continue to pay you competitively and reward performance," Rubin and Bischoff said in a memo to employees Sunday.

But the dismal outlook for Wall Street does not tell the whole story.

Some firms, like Goldman Sachs (Charts, Fortune 500) or JPMorgan Chase (Charts, Fortune 500), for example, may dodge the bonus bust completely. Both banks managed to report higher third-quarter profits at a time when their rivals saw their bottom lines take a big hit.

And bonus declines may also be localized to certain business lines, according to last month's New York State report.

"Some firms and some employees, such as those working in mortgage-related areas, will experience large declines while others, such as those in investment banking, may receive even larger bonuses than last year," the report said.

For example, investment banking remains a robust business. So far this year, banks have done about $21 billion in deals worldwide, just $500 million shy of the amount for all of 2006, according to deal tracker Dealogic.

The picture for bonuses will become clearer as the banks learn more about their 2007 performance. How the next few months shake out will ultimately determine how much extra cash Wall Street brings home, New York State Comptroller Thomas DiNapoli said last month.

"The fourth quarter will ultimately define 2007," he said. Top of page