Morgan Stanley (MS) broke the bad news to its traders and bankers Tuesday: 2011 cash bonuses will be capped at $125,000 and compensation could be cut by 40 percent.
Wall Street firms across the board are slashing costs in anticipation of higher expenses because of new regulations and smaller profits. Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS) and Bank of New York Mellon (BK) are the focus of Wall Street this week as they report Q4 2011 earnings. Results have been mixed at the big banks. Bank of America (BAC) reports earnings Thursday. (See: Small Banks Are King, The Big Guy Still Have Lots of Problems, Says Whalen)
The Wall Street Journal reported earlier this month that total Wall Street compensation would likely fall to 2008 levels. The 400 partners at Goldman Sachs could see their pay chopped in half from 2010. Employees in the firm's fixed-income trading business were warned that compensation would be squeezed by as much as 60 percent, and some employees would not even receive a bonus.
The good times may be over for Wall Street but those still showing up at work should "feel fortunate," says Chris Whalen, a senior managing director at Tangent Capital Partners.
Banks are continuing their search for cost savings and limits on salary increases and personnel cuts are just the beginning. Northern Trust, Chicago's biggest bank, disclosed it was slashing 700 jobs. Morgan Stanley said it was trimming its payroll by 1,600 jobs. Bank of America is eliminating 30,000 positions. An analysis conducted by the Wall Street Journal found that 24 financial firms around the world have cut or announced plans to layoff 103,000 white-collar workers.
Whalen says the pressure weighing on traditional brokerage houses is causing them to rethink their business models. For example, Bank of America's Merrill Lynch unit may be spun off, or Morgan Stanley's Smith Barney division may be divested.
"This is not a 20 or 30 percent gross margin business," notes Whalen. "The traditional brokerage model - especially the really big firms - they're going to get torn apart in this new environment."
Wall Street may have sneered at the Occupy Wall Street protesters in Zuccotti Park, but the two disparate groups have a lot in common.