Pity the Poor Bankers

“It is what it is. But what are you going to do?”

Standing in Grand Central Terminal, a veteran employee of a giant financial-services firm—one of those companies with two names that is in the news a lot—was uncharacteristically fatalistic. His firm had just announced disappointing news about compensation and bonuses.

T.S. Eliot famously said that April is the cruelest month. But for bankers, January is turning out to be pretty harsh. Typically employees receive their bonuses—the raison d’être of most financial whizzes—in the first month of the year. This week Morgan Stanley announced that instead of paying out cash and stock bonuses in January, it would give bankers with base salaries of more than $350,000 IOUs—that is to say, the sum of their 2012 bonus would be paid out over the course of three years. Those who leave earlier are simply out of luck.

Goldman Sachs has traditionally been the highest-paying investment bank on Wall Street. But last year compensation was capped at 38 percent of revenue, down from 42 percent in 2011. The average Goldman employee was paid nearly $400,000 in 2012. That’s a lot. But in 2007 the average employee was paid about $660,000.

JPMorgan Chase on Wednesday slashed the compensation of CEO Jamie Dimon in half as punishment for big trading losses racked up by the bank’s London Whale. Thursday morning, Citi, in the midst of a painful restructuring, announced ugly results. In past years, the typical reaction to a reduction in bonuses would have been rage, followed by swift action. The dissatisfied could walk across the street to another firm, or jump to a private-equity or hedge fund, or start their own asset-management firm. But now, the whole complex is under pressure.

“It’s musical chairs, and there are fewer chairs,” says one 20-year veteran of the industry. “Everyone thinks they’re special, but it’s very Darwinian out there.”

Yes, the elite players will find their way to hedge funds and alternative asset-management firms. Jes Staley, a top executive at JPMorgan Chase, recently jumped ship for hedge fund Blue Mountain Capital. But Wall Street’s middle-class bankers and traders “don’t have the options to go elsewhere,” one investment-banking veteran notes.

To a degree, the bonus clampdown is just a deferred recognition of reality. The bailouts and huge support that the government provided to the markets and individual firms in 2008 and 2009 allowed Morgan, Goldman, and Merrill to carry on as usual for a few years. That enraged the public, but kept employees happy. Now, however, the bailouts have largely been paid back, the guarantees have been lifted, and large banks are left facing a changed climate. Regulations (and the market) forbid them from using too much leverage. The Dodd-Frank financial-reform bill prevents them from gambling too much with shareholders’ money. Sen. Elizabeth Warren, a foe of the industry, has been seated on the Senate banking committee. And technology has eroded a lot of the advantage they once had in trading stocks, bonds, and other products on behalf of clients and for themselves.

Over the past couple of years, as the new reality has settled in, there was a great deal of denial and deflection. Bankers would blame Washington or President Obama for their woes. And it is true that regulatory settlements continue to eat up cash that might otherwise have gone to employees. On Thursday morning Goldman and Morgan Stanley agreed to pay $557 million to settle a Federal Reserve investigation into mortgage-foreclosure practices.

But mostly the losses are self-inflicted. JPMorgan Chase’s massive trading losses were the result of poor oversight and dumb risk taking. Morgan Stanley, it turns out, just isn’t that good at investment banking. Citi, in its earnings announcement Thursday, blamed regulatory costs and environment for its poor results. (That’s very bad form, akin to a golfer blaming his clubs. Every bank has to play by the same regulatory rules.) But in 2012, Citi had to set aside $10.8 billion to account for loans that went bad. That has nothing to do with regulations and everything to do with basic incompetence in the core business of assessing and managing risk.

And reality is finally sinking in. Obama won’t magically repeal the regulations, massive leverage isn’t coming back, and shareholders are finally, finally getting angry about the lack of returns. As a result, banks are focusing on costs, and the biggest cost at the big banks will always be compensation. The reduced pay is taking some of the shine off the industry. Only 35 percent of Harvard M.B.A.s graduating in 2012 went into finance, down from 39 percent in 2011. And the new reality is turning those who stick around into existentialists. Like so many other industries—big media companies, large law firms—there simply is less room for a lot of high-earning individuals. It is what it is.