Thursday, March 13, 2014

A City’s Addiction: A Peek at Wall Street Bonuses and Profits

A City’s Addiction: A Peek at Wall Street Bonuses and Profits

New York State’s Comptroller issued his annual summary of the symbiotic financial relationship between the securities industry and New York City.  While overall employment levels for the industry are still below peak levels reached before the financial crisis, sizable bonuses were in style in 2013.[1]  According to Mr. DiNapoli, the average bonus was $164,530 per person, up 15% over 2012.  Of course, the median payment is much lower as the top executives, traders, and bankers reap disproportionately large bonuses.  Wall Street’s New York profits were $16.7 billion, down from $23.9 billion in 2012.  Mr. DiNapoli cited settled legal settlements and higher interest rates for the decline.  The Big Apple got $3.8 billion or 8% of its tax revenues from the personal and corporate taxes levied on the industry and its employees.
Structure (2003)
There are more important stories buried in the numbers than New York’s reliance on the financial services industry.  Here’s my list.

In 2007-2008, the industry lost $53.9 billion, but immediately followed up those losses with $61.4 billion in profits in 2009.  In other words, the industry recovered all of its losses in just one year.  Thanks go to the taxpayers of the United States and the Federal Reserve.  We invested cheap capital (TARP) in the surviving firms and gave them virtually unlimited access to interest-free financing.  It’s no wonder they were wildly profitable.

While Wall Street was losing nearly $54 billion during the crisis, the industry paid out $50.6 billion in bonuses.  At the same time, Wall Street laid off 15% of its work force.  In any other industry, monumental losses would have reduced the bonus pool to a tiny number.  Clearly “bonus” is the wrong word, because it doesn’t make sense to pay people extra money when they’ve actually generated massive losses.

Wall Street’s addiction to bonuses has increased over time. In 1995, bonuses were 85% of Wall Street’s profits.  In the year before the credit crisis they were 164% of profits, and they are estimated to be 160% of profits for 2013.

The numbers also tell a story of the growing income inequality in New York.  In the 1980s the average compensation for Wall Street was about 2.5 times that of the average New Yorker.  During this past decade it has been 5 to 6 times larger.  Average compensation in the securities industry was $360,000 in 2012, rising at an average rate of 7.8% since the bull market began in the early 1980s.  Meanwhile, the average New Yorker earned $69,000, an annual increase of 4.4% during the same period.   The discrepancy would be even more extreme if we had data for Wall Street’s elite.

The new mayor, Bill de Blasio, has promised to address the growing income inequality in New York City.  However, I’m not sure he’ll find a great deal of support from New York’s Governor, Senators, and downstate Congressional delegation.  I don’t think they’ll be too keen on doing anything to anger the folks who underwrite their campaigns.  Wall Street bonuses and profits will trump the Mayor’s policy agenda.  As a result, the City will remain addicted to Wall Street’s bonus schemes.


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