Wall Street Seeing Biggest Return Since 2003 as Employees Suffer

For employees at the biggest Wall Street banks, 2012 brought a humbling post-crisis reality of job cuts, lower pay and tarnished reputations. For investors, it was a happier story.

The 81-company Standard & Poor’s 500 Financial Index is up 27 percent this year, its largest annual increase since 2003, led by a 104 percent gain in Bank of America Corp. The index beat the broader S&P 500 Index for the first time since 2006.

Shareholders, impatient for the industry to boost profit, were rewarded as Wall Street firms cut jobs and pay, and exited businesses. The shrinking unnerved employees, who watched the chiefs of two big banks lose their jobs and others contend with a drop in deal making and stock trading, stiffer regulations, trading losses, rating downgrades and scandals involving interest-rate manipulation and money laundering.

“There’s always grumbling on Wall Street, which is pathetic given how overpaid we all are, but there is a level of angst this year that is just unprecedented,” Gordon Dean, who left a 26-year career at Morgan Stanley to co-found a San Francisco boutique advisory firm this year, said in a telephone interview. “It’s just a profound sadness and dissatisfaction.”

Shareholders and bondholders who saw compensation costs at the nine largest global investment banks outpace the gain in revenue from 2004 to 2008 are witnessing a shift: Executives are more focused on investors than rainmakers.

Job Cuts

The nine banks -- Deutsche Bank AG, Barclays Plc, JPMorgan Chase & Co., Bank of America, Citigroup Inc., UBS AG, Credit Suisse Group AG, Goldman Sachs Group Inc. and Morgan Stanley -- announced more than 30,000 job cuts in the first nine months of the year, according to data compiled by Bloomberg.

Total pay for traders and investment bankers is about half what it was in 2007, according to an October report from Options Group, a New York-based recruitment firm.

“Shareholders have become a lot more vocal,” said Benjamin Hesse, who manages five financial-stock funds and leads a team of 15 analysts and fund managers at Boston-based Fidelity Investments, which oversaw $1.7 trillion in assets as of Nov. 30. “Managements are taking more shareholder-friendly steps, and that’s really across the board.”

Goldman Sachs cut headcount and raised its dividend in the second quarter, the first time the New York-based bank has done both in the same period. It also named the smallest class of partners since going public in 1999. Morgan Stanley probably will report lower compensation costs in 2012, even as its shares went up, something that hasn’t happened in at least 15 years.

Rewarding Investors

Investors have rewarded management teams that presented the most ambitious restructuring efforts.

Citigroup, the third-biggest U.S. bank by assets, climbed 4.8 percent in the two days after its board ousted Chief Executive Officer Vikram Pandit, 55. Earlier this year, shareholders cast a non-binding vote rejecting Pandit’s compensation package. The stock also jumped 6.3 percent when his replacement, Michael Corbat, 52, said the New York-based bank would cut 11,000 jobs.

After Switzerland’s UBS said it would jettison most of its fixed-income business and cut as many as 10,000 jobs, the Zurich-based bank’s stock price climbed above book value for the first time in 15 months. Many of its rivals, including JPMorgan and Goldman Sachs, haven’t traded above that level all year. Book value is an estimate of how much the bank’s assets would be worth minus all of its liabilities.

Pendulum Swings

Even after gains this year, shares of the nine banks still trade at depressed levels as investors question their ability to boost profits. Total return to shareholders, which includes price gains as well as dividends, has been negative since the end of 2008 at Charlotte, North Carolina-based Bank of America, Citigroup and Credit Suisse. Only Barclays has beaten the S&P 500 Index in that period.

For bondholders, the Bank of America Merrill Lynch Global Large Cap Banking Index has produced a total return of 13.9 percent this year, beating the 11 percent return on the broader Global Large Cap Corporate Index. It was the first time the bank index outperformed the corporate benchmark since 2008.

“The pendulum has totally, totally swung,” said Davide Serra, a managing partner at London-based Algebris Investments LLP, which he said has profited this year by buying bonds of some of the world’s largest banks. “It’s better to be a bondholder than an employee.”

Blankfein Pay

Goldman Sachs and Morgan Stanley, the fifth- and sixth- biggest U.S. banks by assets, began holding conference calls for bondholders this year. Goldman, which hadn’t raised its dividend since 2006, has lifted the payout twice since January.

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