Where The Winners Lose

Nov. 19 (Bloomberg) -- Shareholders in the securities industry are having their worst year since 2002, losing $74 billion of their equity. That won't prevent Wall Street from paying record bonuses, totaling almost $38 billion.

That money, split among about 186,000 workers at Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos., equates to an average of $201,500 per person, according to data compiled by Bloomberg. The five biggest U.S. securities firms paid $36 billion to employees last year.

The bigger bonus pool derives from a record $9 billion of fees for arranging acquisitions and $5 billion for underwriting initial public offerings and sales of junk bonds, the most lucrative securities, Bloomberg data show. Bankers' record fees help explain why 2007 will prove to be the industry's second- most profitable after the subprime mortgage market collapse led to losses at Merrill and Bear Stearns. The last time bonuses declined was 2002 when the Standard & Poor's 500 Index fell 23 percent, and Enron Corp. and WorldCom Inc. went bankrupt.

Goldman's record earnings and gains at Morgan Stanley and Lehman mean all the New York-based firms will be forced to pay more in a year when all but Goldman lost more than 20 percent of their market value...

Securities firms typically use slightly less than 50 percent of their revenue to pay salaries, benefits and bonuses, a percentage that firms adjust throughout the year. This year's bonus estimate was based on the five-year average ratio at each of the five firms. Year-end bonuses usually account for about 60 percent of compensation.

In the first nine months of 2007, Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns told their shareholders that they set aside $52.4 billion for compensation, up 9 percent from a year earlier. For the whole year, the figure rises to $62.5 billion, according to analysts' estimates that combined revenue at the five largest securities firms will climb 1.7 percent to $135 billion.

That brings bonuses to almost $38 billion. The total increases when bonuses for employees at hedge funds, leveraged buyout firms and banks such as New York-based JPMorgan Chase & Co. and Frankfurt-based Deutsche Bank AG are included.

The industry's bonuses are larger than the gross domestic products of Sri Lanka, Lebanon or Bulgaria. The average $201,500 bonus is more than four times the $48,201 median household income in the U.S. last year, according to U.S. Census Bureau statistics...