Bloomberg’s Elizabeth Dexheimer reported earlier this week on the big change in who gets paid the most on Wall Street. For years, it was bond traders at investment banks who sat at the top of the pyramid. Now, a lot of the bond trading shenanigans of the past (see Jeffrey Litvak) are gone, mortgage bond mania is long over, and traders’ salaries are falling. Meanwhile, asset managers — mutual fund managers, big management firms like BlackRock, brokers, and other investment advisors — are thriving.
Wall Street compensation consultant Alan Johnson sums it up:
“This is really a sea change. It’s been coming and coming and now it’s finally apparent that the largest paychecks don’t come from Wall Street banks.”
A lot of people will greet the last part of the sentence with applause. To some extent, it’s an indication that the criticism of Wall Street and its pay, coming from both sides of the political divide, has been effective. The big caveat is that much of the money that used to come from the much-criticized big banks has just moved over to the buy side, the folks who collect and manage money for clients. Overall, in fact, Wall Street bonuses have resumed their climb, as you can see in the chart below:
Is this a victory for the anti-bonus crusade? It depends on what you think of as the central aims of all the criticisms of Wall Street we’ve seen since 2008. Essentially, the critics of Wall Street had two separate policy goals (three, if you count “punishing bankers” as a policy imperative). The first of these was to reduce the incentives in the financial industry to engage in the riskiest patterns of behavior. Critics hoped that reducing the bonuses on the trading floor would cut the incentive for banks to find opaque, exotic, and systemically risky strategies in the hope of an outsize payday.
In this seem to have succeeded. Most of the asset management industry is decidedly risk averse; its profits come largely from charging investors one or two percent management fees every year to keep up with the market indices. Maybe not a great deal for investors, but it won’t take down the financial system.
The second major goal of Wall Street’s bonus critics, or at least those on the leftish side of the aisle, was to take arms against the rising tide of inequality. Whatever you think of this particular tide, it’s awfully hard to stand in the way of a wave. The average New York City securities industry bonus is back up to $164,530, according to the state comptroller’s annual report. Not quite where it was in 2006 and 2007, but close, and much higher than it was at the height of the tech boom in 2000.
If you believe that pay at the top is too high, you’ll probably appreciate cuts wherever you see them. For the anti-bonus movement, though, the investment banks were the easy targets: big, limping after the 2007 crash, and already in the sights of regulators. It’s hard to imagine what kind of a campaign will cut the pay of buy side managers, whose work is much less public. Notably the beneficiaries of any cuts to buy siders’ pay would mainly be the folks wealthy enough to need their services.