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 & Poors 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.
Theres 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. Its 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.
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 thats 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 hasnt happened in at least 15 years.
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 Pandits 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 Switzerlands UBS said it would jettison most of its fixed-income business and cut as many as 10,000 jobs, the Zurich-based banks stock price climbed above book value for the first time in 15 months. Many of its rivals, including JPMorgan and Goldman Sachs, havent traded above that level all year. Book value is an estimate of how much the banks assets would be worth minus all of its liabilities.
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 worlds largest banks. Its better to be a bondholder than an employee.
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 hadnt raised its dividend since 2006, has lifted the payout twice since January.
The banks return on equity, a measure of how well it has reinvested shareholder money, dropped to 8.8 percent through the first nine months of 2012 from 19.2 percent in the same period in 2009. The stock traded below book value every day this year.
To boost returns, Goldman Sachs cut about 2,800 jobs and reduced firm-wide compensation 16 percent in the past two years. CEO Lloyd C. Blankfein, 58, who was awarded a record-setting $67.9 million bonus for fiscal 2007, received $12.4 million in compensation for 2011.
Across Wall Street theres a recognition that things are going to change and that its very difficult to justify paying people entrepreneurial wages when theyre really utilizing the platform and the capital of a public company, said Michael Aronstein, founder of New York-based Marketfield Asset Management, which manages about $3.5 billion. This has been in the cards for five years, but it takes a long time.
A focus on boosting shareholder returns also helps senior employees and executives, who are getting a larger portion of their compensation in stock than they did before the financial crisis. Blankfein owned 1.79 million shares of Goldman Sachs as of Nov. 28, according to a company filing. Their value has climbed $67 million since the beginning of the year to $228 million as the stock rose 41 percent.
Banks have been humbled this year by trading losses and unprecedented fines. HSBC Holdings Plc, Europes largest bank by market value, agreed to pay a record $1.92 billion this month to settle U.S. probes of money laundering after being accused of helping to provide terrorists and drug cartels with access to the U.S. financial system. Standard Chartered Plc was fined $667 million by U.S. regulators for facilitating transactions with Iran in violation of sanctions. Both banks are based in London.
Kweku Adoboli, 32, a former trader at UBS, Switzerlands biggest bank, was sentenced to seven years in jail on Nov. 20 for fraud in connection with $2.3 billion in losses on unauthorized trades. The U.K. regulator fined the bank 29.7 million pounds ($48.3 million) on Nov. 26, saying the loss revealed weaknesses in management systems and internal controls.
UBS is set to pay as much as $1.6 billion to settle regulators claims that it manipulated the London interbank offered rate, or Libor, according to a person familiar with the probes. The fine would be more than three times what London- based Barclays agreed to pay in June. About a dozen banks are under investigation for rigging the benchmark or equivalent borrowing rates in Europe and Japan.
Barclayss 290 million-pound fine led to the resignation of CEO Robert Diamond after 16 years at the U.K.s second-biggest bank by assets. The day after he resigned Diamond, 61, told Parliaments Treasury Select Committee that clearly there was behavior that was reprehensible. It was an abrupt turnaround for a man who had declared, 18 months earlier, that the period of banks remorse and apology should end.
JPMorgan CEO Jamie Dimon apologized for a trading loss of at least $6.2 billion at his New York-based bank. As head of the biggest and most profitable U.S. lender, he also was the highest paid of his Wall Street peers, awarded $23 million in pay and bonuses for 2011. He was one of the most aggressive defenders of his industry against politicians and regulators, having publicly mocked U.S. Treasury Secretary Timothy F. Geithner, challenged Federal Reserve Chairman Ben S. Bernanke and faulted former Fed Chairman Paul Volcker.
We have let a lot of people down, and we are sorry for it, Dimon, 56, told the Senate Banking Committee on June 12 about the loss at a JPMorgan unit that the bank said was supposed to invest the firms own money and hedge its risk.
At least four senior executives have left the company or been reassigned since the loss was revealed in May.
Morgan Stanley CEO James Gorman, 54, said last month that scandals such as Adobolis trading loss have made it difficult to improve the industrys reputation. He said employees should stop complaining about lower pay.
Theres not a lot of sympathy, Gorman said at a Nov. 29 Securities Industry and Financial Markets Association conference in New York. The rest of society is going through at least as difficult a time from a much lower starting base.
The industrys lack of popular support was evident at the polls this year. Wall Street employees gave more money to Mitt Romneys presidential campaign than to President Barack Obamas, only to see voters re-elect Obama. Elizabeth Warren, a Democrat who has championed tougher oversight of banks, defeated Republican U.S. Senator Scott Brown in Massachusetts. In France, voters elected as president a Socialist candidate, Francois Hollande, who said my enemy is finance.
Shareholders expressed some sympathy for those who have lost jobs at banks or are being forced to adapt lifestyles to new pay levels. The biggest U.S. banks are cutting at least $30 billion of expenses, and I shudder to think how many people that is, said Kevin Conn, a financial-stock analyst at Boston- based Massachusetts Financial Services Co., which managed $310.8 billion in mutual-fund and institutional accounts worldwide as of Nov. 30.
The environment has shifted probably a little bit toward shareholders, Conn said. Im not sure that theres specifically shareholder pressure to cut compensation, but there is shareholder pressure to raise returns.
Bankers such as Dean and his two Morgan Stanley colleagues who started Dean Bradley Osborne LLC this year say they got out just in time. He said he sees the misery on Wall Street when friends at big firms tell him how lucky he is to have left.
Its not luck, said Dean, 49, who has hired three other former Morgan Stanley bankers. Its about understanding that the best jobs in finance may not be at the banks anymore.
I was just talking with my wife about this last night, Dean said. I look back on this year, and this is the happiest year Ive had in 20 years. Its just starting fresh. Being able to do it the way we know it should be done is so liberating that I actually look forward to coming to work. I cant say the last five years at Morgan Stanley I felt the same way.