Guest comment: Last year's bonuses were as good as it gets

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With the exception of Goldman, bonuses are all downhill from here, says author and ex-banker William Cohan.

As assuredly as the swallows return each year to Capistrano, the closer the Wall Street calendar gets to bonus day, the more assiduously investment banking managers look for excuses to reduce the annual payouts - many of which run into the millions of dollars (and pounds) - to their bankers and traders.

Last year, with the markets robust, LBOs ever-increasing and banking profits soaring, Wall Street's managements had nothing to impede their ongoing struggle to reduce compensation (for everyone but themselves, of course). Accordingly, in 2006, the bonus payouts were massive, reaching some $16.5bn alone at Goldman Sachs. Wall Street CEOs gorged: Lloyd Blankfein of Goldman Sachs gobbled up $53.5m; Stan O'Neal at Merrill Lynch took home $47.3m; and Jamie Dimon at JPMorganChase got by with $44.4m. In many cases, even the underlings at the top firms walked off with close to $40m; the two co-presidents at Goldman received pay packages totalling $52.4m each.

And thanks to the public filings of the Blackstone Group, a leading private-equity firm, we now know about the heaping helpings hoovered off the table by the guys who run the top private equity firms, making the investment bankers look like pikers. For 2006, Blackstone paid CEO Steve Schwarzman $398.3m and his partner, Pete Peterson, $212.9m. (Schwarzman and Peterson also took out another $677m and $1.88bn respectively in the June 2007 Blackstone IPO.) Hamilton James, Schwarzman's dauphin, was paid $97m in 2006.

Aaah, but what a difference a few months make. This summer's liquidity crunch has dramatically changed the bonus calculus on Wall Street. The M&A business, once on track during the first half of the year for record volumes in 2007, now looks stalled out, with August becoming one of the slowest months for M&A activity in years. Even September, which practitioners hoped would jump-start a recovery after everyone 'returned to their desks' post-Labor Day, is shaping up to be another dud. Then there is the virtual standstill that has overtaken the market for large private equity deals. Financing for massive buyouts is no longer available and Wall Street bankers and private-equity investors are struggling mightily, with varying success, to close (or re-cut) the deals already committed to. The profits generated in 2006 and early 2007 by advising on and proving financing for these deals are starting to resemble quicksilver.

Not since the September 11 calamity and its repercussions have Wall Street's leaders had an excuse as robust as the 2007 market meltdown. You can count on them to use it, too, since the timing is nearly perfect for them to incorporate the liquidity crunch into the HR-approved scripts that will be delivered to bankers and traders along with the smaller paychecks. Bonuses on Wall Street this year will be less than in 2006 - in many cases, far less. And if the deal slump continues, cuts in bonuses won't be sufficient to restore the ongoing profitability that investors demand. The choice for managers then will be to make personnel cuts in the banking groups, just as they already have in their mortgage-related groups.

There is no reason to fret, though. The markets are cyclical, even if most people tend to forget. There is always next year.

Or, if you can somehow swing it, get yourself hired at Goldman Sachs. On September 20, Goldman alone defied the current misery on Wall Street and reported an 80% increase in third-quarter earnings to $2.85bn - more than 20% higher than the most bullish estimate of any Wall Street analyst. With good reason: Goldman CFO David Viniar said the firm had no plans to slow hiring. And the outlook for Goldman's 2007 bonuses? The firm's increased its quarterly accrual for compensation and benefits in the third-quarter to $5.92bn, some 68% higher than last year's third quarter. And at $16.9bn, Goldman's nine-month 2007 compensation and benefits accrual already exceeds the record total amount paid out for all of 2006. Boo-ya.

· William D. Cohan, the author of The Last Tycoons: The Secret History of Lazard Frères & Co. (Doubleday, 2007), is a former managing director at JPMorganChase.

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