Monday, Jun 25, 2007
Kiss Goodbye to City Bonuses!
Bloomberg: Bear Stearns's `Friends' Reject Hedge Fund Rescue in LTCM Redux
Collapsed mortgage bond hedge funds. The other banks won't help Bear Sterns in their hour of need. Can they survive? Will this trigger a domino effect in global investment banking? I don't know. What I do know is that we are not see the big city bonuses early next year that we saw this year, because banks need to retain cash to ensure their survival through the rough period ahead. That means that a major driver of the London property market just got knocked out!
Posted by royston @ 10:11 AM (364 views) Add Comment
15 Comments
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1. Hedger said...
Clearly, Bear Stearns is having a difficult time but they are the major player in the CDO market and are the most exposed. There are some real dangers for firms associated with CDO's but this is one of the biggest M&A years in history. If you dont think there are going to be large bonuses then you are deluded.
2. confused76 said...
"Will this trigger a domino effect in global investment banking?"
unlikely,
just like LTCM did not trigger a domino effect with hedge funds
I think you need crisis like this (the LTCM, Enron, Wcom, Bear Sterns) to keep people from falling asleep
there will be a further repricing of risk, that is sure,
and borrowers will pay part of this huge bill
banks will still win in the end (what a cartel !!)
3. royston said...
c76,
I really do think this time is different. As you pointed out, they have managed to patch up this overstretched balloon many times before. The problem with that is that those imbalances never actually got sorted out, we just bungled along to the next, bigger disaster. The credit explosion is too big and too global. There's nowhere else to go. There is not other country to take up the slack. There is no big financial instrument that is untainted that could take the focus now - like property did when the tech stocks blew up. In short, the boom of the 'miracle global economy' is over! We just have wait to see the wreckage. Then we are in for a very prolonged clean up.
4. Orwell said...
Clean up? errrrm to put it mildly yes, but one hopes its not the banks that clean up of course...
5. royston said...
Hedger,
Contrary to popular City opinion, banks don't pay bonuses out of fairness, in order to fairly reflect an individual's contribution to the revenue stream. They pay to keep people in place to the slew of deals they expect next year. Guess what! With no loose money, there ain't going to be a lot of M&A next year! Ergo, the bankers can whistle for their bonuses. Of course, the senior management won't actually say this. They will argue that under the coming difficult circumstances, they need people 'to show loyalty' and so bonuses for this year will be paid out in 'installments', over the next few years. That's the City for you - if you want friend, get a dog!
6. royston said...
Sorry,
The scenario I just described refers to banks who are still solvent at year-end. Clearly, bust banks won't be paying any bonuses!
7. sold 2 rent 1 said...
The stocks crash may arrive too late this year to prevent the big xmas bonuses of M&A boom being paid.
The question is will many of The City people still have their jobs by xmas 2008.
As for the banks "will still win in the end"?
You may be right.
From what I have read it is the pension funds that could be the most exposed.
Retiring into poverty could be the norm from 2012 - who said the baby boomers were the lucky generation?
8. confused76 said...
2007 bonuses may be good
2008 i am not so sure
sure enough bonuses will not be paid at Kensington and many subprime lenders
re stock options, let s see..........
http://finance.yahoo.com/charts#chart1:symbol=bb.l;range=2y;indicator=split+dividend;charttype=line;crosshair=cross;logscale=off;source=undefined
http://finance.yahoo.com/charts#chart1:symbol=hbos.l;range=2y;indicator=split+dividend;charttype=line;crosshair=cross;logscale=off;source=undefined
http://finance.yahoo.com/charts#chart2:symbol=KGN.L;range=2y;indicator=split+dividend;charttype=line;crosshair=cross;logscale=off;source=undefined
9. royston said...
Anyone remember Drexel Burnham Lambert? (If not then Google them.) The same situation is happening again - except this time, the entire investment banking industry is at fault. IMHO, where we go from here is anybody's guess.
10. Hedger said...
Too many people argue through their emotions on this forum rather than knowledge. Prolific postings do not make you correct.
I do think the market is overvalued and selfishly I hope it tanks. But all this talk of swathes of city people out of jobs by Christmas is nonsense. I enjoy reading this site as most of the views shown here I share. But dont lose (not one "o") sight of the big picture. By bailing out their hedge fund, Bear Stearns will only lose 7% of income this year. That will smart a bit, for sure but its not going to the wall. To then extrapolate that a global fianancial disaster has started is ignoring the facts and numbers involved. If Bear Stearns is finished, then you better start shorting it because not a lot of relative value has come off it yet.
I have followed this site for a long time now and I sense there is a growing reverse-head-in-the-sand mentality from some of the posters. I think the underlying theme is ok but I think all the doom and gloom is misplaced. Yes, inflation is higher than target, yes interest rates will increase further, yes I think house prices will go down. No, I dont think we are entering the next great depression.
11. Hitchy said...
if you take 2000 as an indicator, the stock market got hit hard from march onwards, but bonuses at the end of the year were the largest in the history of the industry - it wasn't until 2001 that it hit so i would suspect that 2008 will be the year to see a slow down in bankers comp - the other thing to remember is that there's a reasonable proportion of turnover in the industry - call it 10-15% - this 10-25% will be on guaranteed bonuses through the end of '07 and some lucky ones may have negotiated through to the end of '08
12. royston said...
Hedger,
Do you know anything about cockroaches? It's basically like this, if you see one on the kitchen floor, you can infer there is an infestation behind the fridge? That's what we have with Bear Sterns right now - the first signs of a much bigger problem. If there was any way they could have hushed this up they would have. But they couldn't! And they or any of the other banks won't be able to hush up the blow ups coming down the pipe. How can I be so sure? What is happening now is the inevitable consequence of the credit explosion! I have been expecting it for over a year.
13. dohousescrashinthewoods said...
Hedger, good to see a different point of view, adds balance to the chorus of "Second Great Depression".
I think it's a big deal that the BIS used those words though.
I also, personally, feel there is decent risk of a nasty downturn and some chance of a meltdown (if this is the thin end of a parabolic/leveraged wedge)
To be honest, I would like to hedge this risk by emigrating out of the UK/US and, since I wanted to emigrate anyway, it seems like a reasonable time to take steps.
After all, if little or nothing happens, I can come back in a few years' time, but if people start needing wheelbarrows of cash to pay for a loaf of bread, I won't be able to get out later.
Given the risk is now more than just idle doom-monger talk (as stated by the BIS), crossed with the seriousness of the outcome should it in fact materialise, I think that taking quite dramatic steps to mitigate it is a rational response.
I think that's the most even-handed explanation I can give (i.e. with the entertaining emotion taken out) - and I wonder, do others share my analysis? (If not my strategy, given that not everyone wants to emigrate)
14. dohousescrashinthewoods said...
By the way, interesting links, confused76,I note that Kensington has been on the wane since April last year. Looks like this HPC has roots going back quite a way.
15. the bald man said...
Dohouse...... My own view is that after such a period of rising asset prices and increasing debt levels there has to be a serious chance of a reversal in fortunes.