The next casualty of the credit crunch: lavish Wall Street paychecks. As the year-long credit crisis spiraled out of control last week, the last two major U.S. investment banks converted into bank holding companies regulated by the Federal Reserve. Now Goldman Sachs Group Inc and Morgan Stanley which for decades made windfall profits and enriched top rainmakers, will look more like the stodgier commercial banks. The new arrangement will be more stable, but also less profitable and, ultimately, less generous at bonus time. “We're at the end of an era. The higher risk, higher reward strategies the investment banks used are going to be tamed,” said John Challenger, who runs outplacement firm Challenger Gray & Christmas and tracks pay trends. “The same de-leveraging seen at the banks will go on in compensation.” In addition to slowing revenue and falling asset values, investment banks must change the way they do business. A combination of tougher federal regulation and pressure to rein in leverage means eye-popping bonuses are going the way of Wall Street itself. At the top of the ladder, Morgan Chief Executive John Mack and Goldman chief Lloyd Blankfein could find their pay packages measured against a new peer group – commercial bank executives. Last year, Blankfein received compensation totaling about $68 million for largely avoiding the credit losses that humbled the rest of the industry. Mack received just $1.6 million in pay and no bonus after huge fourth-quarter losses, although he received more than $40 million in 2006. By comparison, JPMorgan Chase CEO Jamie Dimon received $29 million last year, while Bank of America Corp chief Kenneth Lewis received $20 million. While some traders make more than the boss, cutbacks at the top may trim pay for everyone else. “If they're going to pay them like commercial bankers, it's an entirely new world,” said Pearl Meyer, a veteran Wall Street recruiter and compensation expert at Steven Hall & Co. “I don't think compensation will be going back to the good old days.” Politics Political and regulatory pressures could also weigh on pay. In Congress this week, a historic $700 billion government bail – out has been bogged down as lawmakers seek to limit pay for CEOs whose ailing banks received federal help. Restrictions on risk and innovation in trading strategies will drag down Wall Street results and therefore compensation, said Adam Zoia, who runs recruiting firm Glocap Search. “Some trading strategies that were a core part of the independent banking model will not be viable. The capital needed will make them less profitable. Your franchise just became less valuable,” Zoia said. “Overall compensation this year, and probably next year, will be down.” Regardless of regulatory pressure, investment bank compensation will come under pressure in an environment of falling revenue and steep job cuts. Analysts expect lower returns in this era of less leverage and more capital and reduced revenue amid one of the worst environments in decades. Challenger said financial services companies announced nearly 103,000 job cuts through the end of August, on top of 153,000 reductions last year. Thousands more jobs will be cut from now through the rest of this year, he said. Even so, most investment banking and trading businesses are already part of big “universal” banks formed after a decade of consolidation. Citigroup Inc JPMorgan Chase & Co UBS AG and Credit Suisse Group AG built around commercial banks, did not necessarily pay less than the independent Wall Street firms. “People forget that most of the firms in the investment banking business were already banks and they still paid out lots of money,” said Johnson & Associates' Alan Johnson, a leading Wall Street pay consultant. “On average, the commercial banks were very competitive on compensation.” Still in this new environment, where banks are scrambling to retain capital and shrink the size of their balance sheets, traditional pay practices no longer look appropriate. “These banks won't be in a position to pay out 50 to 60 percent of their revenue as compensation,” Steven Hall's Meyer said. “They're just not going to have the same funds to distribute. I don't think they can pull that amount of cash out of the business anymore.” – Reuters __
