Wall Street’s Middle Class Suffers as Business Changes
This column first appeared on Breakingviews.com, the global financial commentary service of Thomson Reuters.
Income inequality isn’t just a rallying cry for the poor. It’s even hitting home in one of the traditional breeding grounds of the very rich: Wall Street. Tens of thousands of aspiring bankers and traders who flocked to securities firms like Goldman Sachs and Morgan Stanley over the past decade are coming to realize that the big bonanzas they toiled toward may never come their way. Compensation is down—and will stay there. Meanwhile, their bosses are staying put, cutting off avenues for advancement. Yes, it’s time to shed a tear—if only just one—for the middle class of investment banking.
This cohort even has a face: Greg Smith, the former Goldman vice president who left in a huff, wrote an op-ed piece in The New York Times, and garnered a $1 million advance to write Why I Left Goldman Sachs. His story is emblematic of his generation financiers from New York to London to Hong Kong, who sold their souls for lucre after graduating from the world’s elite business schools to strike out in the money business. And yet the numbers tell the story of their frustration rather more convincingly than Smith’s memoir.
Consider the hypothetical case of a young banker joining Goldman around the same time as Smith did in 2000, and just after the firm’s IPO made centi-millionaires of its partners. At the end of that year, Goldman employed 22,627 workers and paid out compensation and benefits of $7.8 billion. Do the crude arithmetic, and that works out to around $343,000 of average pay for each employee, though the spoils would have been divided on a more meritocratic basis. Still, that gives an indication of what a newly minted MBA joining the firm might reasonably have expected to shoot for.
For the next few years, that banker would have worked like a dog, routinely clocking in 15-hour days—even on weekends—and pulling all-nighters at short notice to scrub PowerPoint presentations for senior bankers heading to early morning pitch-meetings. Many firms even abetted these tireless workers by hiring valet services to take care of personal business, like picking up fresh shirts at the cleaners. This was part of the bargain—a few years of toil that would lead them to big bonuses, a fancy Managing Director title, and potentially, for those at Goldman at least, partnership status.
As the dotcom bust receded and the leverage inflated the next boom, the wager looked like a good one. Take Goldman’s 2007 annual report—prophetically titled “We See Opportunity.” During that robust year, Goldman employed 30,522 people and showered them with $20.2 billion of largess. So the average compensation and benefits bill for a Goldman staffer in 2007 had nearly doubled to $661,000 over seven years.
Flash forward past the global financial crisis, the tepid economic rebound, years of horrific headlines for the financial industry, and a new regulatory regime. Annualizing Goldman’s results so far this year, the firm with 32,600 employees can be reasonably expected to pay out compensation and benefits in the order of $14.6 billion, or $449,000 a head. That’s down a third from the 2007 boom year. Goldman isn’t alone. The average at Morgan Stanley will likely be around $277,000 based on the amount accounted for in its nine-month accounts. That’s some 20 percent less than Morgan Stanley paid out in 2007, also a banner year for the firm.
This means the young banker who became an associate at a Wall Street firm in 2000, and toiled away for the better part of a decade, is now a mid-30-something executive getting paid less, on average, than just a few years ago. Smith, for instance, recalled 2006 and 2007 as the high-water marks of his compensation in an interview with The Exchange on ReutersTV. It is hard not to see his book, which contains no new shocking revelations of Goldman chicanery, as little more than a sour-grapes manifesto for the disgruntled middle classes of finance.
And guys like Smith may be the lucky ones. In the face of stagnant business and declining profit margins, investment banks have started laying off employees. In the wake of disappointing third-quarter results and rising pressure from outside investors, investment bank Lazard in October said it would slash annual costs by $125 million—a move that would require layoffs. Swiss Bank UBS is in the midst of culling more than 10,000 employees around the world, including a significant number in the U.S.
For the truly outstanding members of the set, there is always a path to wealth and power, the apotheosis of which is the biannual awarding of a Goldman partnership. Yet even in this elite rite of passage the conflicts of Wall Street inequality are apparent. As opportunities and pay have dwindled, the attrition of Goldman partners has slowed. That has forced Chief Executive Lloyd Blankfein to nudge some partners out to make way for the next generation of leaders at the firm. Even so, the firm will struggle to find a way to add more than the 110 partners that made the grade in 2010. The firm may announce as few as 75 new partners to its ranks on Wednesday.
The top of the finance food chain knows that compensation in the industry has been structurally altered. There’s less money to go around while the demands of shareholders to be fed has increased. The lower ranks also know this to be true and are adjusting their expectations accordingly. Just don’t expect them to sleep under their desks like the frustrated middle-management VPs they work for did all those years ago.