Two Plus Two Newer Archives - What does it mean to Fade a pick? (Not in FAQ

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Traders are the stupid money in the stock market

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LOL! Nobody ever got rich by fading Goldman Sachs.

Story by Jenny Anderson
The New York Times
November 7, 2006

On Wall Street, the rich keep getting richer.

For a fourth consecutive year, year-end bonuses are forecast to be highly lucrative, with the payouts rising 10 percent to 15 percent from 2005, according to Alan Johnson Associates, a leading executive compensation consultant.

Investment bankers, who give advice to corporations, are expected to experience the biggest percentage jump, about 20 percent to 25 percent this year, from 2005.

But it will again be the traders, who make investment bets for their firms, and those who operate in the complex world of structured products and derivatives that will take home the biggest checks this year, with top-end estimates in the range of $40 million to $50 million, Wall Street executives say.

“Traders are making more than bankers and that will probably continue for one more year,” said Alan Johnson, the managing director of the consultant firm. “Then it will be a horse race.”

Of course, the $50 million trader is the exception, not the rule.

The year-end bonus, which makes up most of a Wall Street professional’s compensation, can vary widely.

The average managing director at a top Wall Street bank is expected to take home a bonus of $1.7 million this year, up from about $1.2 million last year. The range of managing director total compensation, according to Mr. Johnson, is $1.7 million to $2.3 million. While those may seem stately sums to many, it puts those executives back where they started before the technology bubble burst and their pay tumbled nearly 50 percent.

Then there are the rainmakers. Senior investment banking executives say top bankers can expect bonuses of $20 million to $25 million. Financial sponsors, the bankers who cater to the private equity funds that have driven much of the frenzied merger activity this year, have had a strong year in particular.

Globally, more than $3.2 trillion worth of mergers and acquisitions have been announced in 2006, compared with $2.4 trillion in 2005, according to Dealogic. Buyouts represented 17 percent of the dollar total for 2006, compared with 12 percent last year. Other investment banking areas that have been strong include health care, financial institutions and energy and power.

Traders, in comparison, can make extraordinary sums because they use the bank’s capital to make bets, allowing them to take big risks that either result in big rewards or gigantic headaches. Traders can make 5 percent to 10 percent of what they earn. For example, a trader who makes $500 million for the bank might take home $50 million.

Wall Street is evolving from a business focused entirely on clients--corporations, institutions and individuals--to one that generates money betting its own capital (proprietary trading) along with the business of advising and trading for clients.

The banks are being buoyed by a number of factors, including abundant global liquidity--capital available to be invested--and tremendous international growth, focused in large part on India and China, but also extending to the Middle East, Eastern Europe and Russia. For the first nine months of 2006, Goldman Sachs and Morgan Stanley earned more in profits than they did in all of 2005, according to their financial statements.

And if a rising tide lifts all boats, Wall Street’s booming fortunes are producing more yachts.

The average securities salary is now 5.1 times the average salary paid in other industries, up from 2.5 times in 1990 and 4.3 times in 2003, according to a recent report released by the New York state comptroller, Alan G. Hevesi. The securities industry accounted for only 4.7 percent of jobs in New York City in 2005, but 20.6 percent of the wages.

First-year associates, those just out of business school, can expect a range of $200,000 to $270,000 in total compensation--base pay, bonus and long-term compensation--while a first-year analyst, just out of college, can expect to make $105,000 to $145,000. Guarantees--contracts which promise to pay bankers a fixed amount for a certain number of years--are back, but only one- and two-year contracts, Mr. Johnson said. At the height of the technology boom, three-year guarantees were commonplace.

But life in the middle might be getting tougher, according to Mr. Johnson. Associates and vice presidents were in high demand in 2003 because the markets came roaring back to life before staffing on the Street was adequate. Now, however, demand seems to be weighted toward the ends rather than the middle.

“We are seeing a lot of demand at the top and a lot at the bottom, but not as much in the middle,” Mr. Johnson said. “With technology, you don’t need as much in the middle.”

Wall Street managers say they are feeling less of a threat from hedge funds. While top talent may be lured away by the promise of independence and more self-generated profits, many hedge funds are struggling to post good enough numbers to attract enough capital to make it worth the risk. Also, those funds tend to be small. “A big hedge fund has 40 people,” Mr. Johnson said. “They will hire your two best but they will not hire the 98 people behind them.”

Others disagree, saying there is much competition for talent.

And Wall Street giants’ compensation still pales in comparison with their hedge fund counterparts. In 2005, the top hedge fund manager took home $1.5 billion in pay while the price of entry to be on the list of the top 25 paid managers, compiled by Institutional Investor’s Alpha magazine, was $130 million.