Tuesday, November 29, 2011

Wall Street Facing the Pinch?

As if the nation-wide Occupy Wall Street Movement was not enough, here comes some more bad news for Wall Street: The famous year-end bonuses of Wall Street workers are expected to shrink this year.

Johnson Associates, a New York-based consulting firm, estimates that year-end bonuses at Wall Street will drop by an average of 20% to 30% this year whereas some professionals will see a drop in their bonuses by as much as 45% compared with last year. It is the first time since the 2008 Lehman Brothers bankruptcy and the financial meltdown which ensued that bonuses will go down. Alan Johnson, the MD of Johnson Associates attributes the drop to the sluggish economy, uncertainty about financial markets, and greater regulations, which are inducing financial services firms to reduce their bonus pools.

The unwelcome bonus cuts will not affect workers uniformly. Fixed income traders will see the greatest drop in their bonuses, up to 45%, according to the report, while investment bankers will see drops of about 20%. Wall Street’s “rank-and file” that is those holding lower level staff positions will see bonus declines ranging from 15% to 25%. However, some groups like high net-worth advisers and asset managers might see even a small increase in their bonuses. Moreover, Wall Street does not need to despair because Johnson Associate estimates that Wall Street will bounce back by next year and bonuses will be return to normal level. In fact, the report adds that in the absence of further economic crisis and bankruptcy of major financial institutions or European economies, bonuses at Wall Street around this time in 2012 are expected to rise by as much.

The report suggests that the regulatory regime has become more stringent for Wall Street financial intuitions since the 2008 financial meltdown. That is not necessarily a bad thing because moral hazard, to an extent, is prevalent at Wall Street. Investment bankers, for example, do not bear the full costs when risky investment decisions, such as dabbling in sub-prime mortgages that led to the housing bubble, go awry. On the other hand, when risky decisions turn out to be a success, rewards can be ample for those at Wall Street who made those decisions. This creates an incentive for making riskier decisions, whose aggregate effect can be detrimental for the economy. Hence some like Phil Angeledis argue that reasonable regulations are needed to check Wall Street's reckless risk-taking propensities and speculative investments, which can precipitate economic troubles for the nation.

The expected reduction in year-end bonuses do point out that all is not well at Wall Street. Wall Street is not an exception however as millions of Americans are also in the throes of economic troubles because of the anemic pace of the country's economic growth. Although, of late, the U.S. economy is showing some signs of recovery, it is quite possible that the Eurozone crisis could spill over to across the Atlantic and adversely impact the American economy as well should Europe fail to adequately address and contain the crisis. Here is hoping though that that does not happen.