When Vikram Pandit spoke on Citi's conference call, he suggested that no one really knows what's coming next in terms of investment banking revenues. "The entire market now is still searching to see what the new secular normal is," he claimed.
Bankers at Goldman and Bank of America/Merrill Lynch need to hope the new "secular normal" is not represented by the recent quarter.
In Q3, both Goldman Sachs and Bank of America's Global Banking and Markets business (Bank of America Merrill Lynch) made a loss. Goldman made a loss of $393 million vs. a profit of $1.9 billion in Q3 2010. Bank of America Global Banking and Markets made a loss of $302 million compared to a profit of $1.5 billion last year.
BofA/ML doesn't break out headcount of compensation costs, but at Goldman there are - unsurprisingly - signs of frantic attempts to cut costs. Compensation accruals are down a massive 59 percent year-on-year since the third quarter of 2010. Headcount has fallen 1,300 since the end of June (despite this being the quarter when most graduate hires arrive). Year-to-date compensation per head has been trimmed nearly 30 percent vs. 2010.
Much of the problem at Goldman is revenues (down 60 percent year-on-year in Q3), but it's also costs. While compensation costs at the bank still seem remarkably elastic, non-compensation costs are not. These were actually up 21 percent year-over-year in the third quarter.
Of Goldman and Bank of America, Goldman appears to have come out worse in 2011. Its net profits are down 72 percent year to date versus 2010; headline net profits at Bank of America Global Banking and Markets are down 40 percent. BofA/ML has achieved a remarkable 42 percent increase in its M&A revenues so far this year; Goldman has achieved an increase of just 6 percent.
The danger now is that Goldman takes on more risk to get out of its hole. J.P. Morgan and BofA/ML both substantially reduced their value at risk in the third quarter, but Goldman increased it. In the process, it appears to have clung to the crown of being the best payer among the big investment banks, but only just - average compensation per head at Goldman Sachs was $293,000 in the first nine months of the year; at J.P. Morgan, it was $290,000.
But do J.P. Morgan's compensation figures include bonuses?
Does Goldman really pay more than J.P. Morgan though?
A note in J.P. Morgan's Q3 earnings presentation suggest the compensation figures it publishes don't include any bonuses.
Specifically, this note states:
"Headcount-related expense includes salary and benefits (excluding performance-based incentives), and other non-compensation costs related to employee."
If bonuses are additional to J.P. Morgan's compensation figure, bankers at J.P. Morgan are substantially better off than those at Goldman Sachs. We asked J.P. Morgan to comment on the meaning of its note and it was unable to immediately provide a conclusive answer. However, we understand that bonuses are, probably, in there.
This article first appeared on our UK site.