Booming bonuses make it party time for the City's rainmakers

It is likely to be a bumper Christmas for London's City and New York's Wall Street, with bankers holding their breath for hefty bonuses, reflecting the record profits most of the blue-chip financial firms have notched up in 2005.

Investment bankers in the City are looking forward to their best bonuses for four years as they reap their rewards from buoyant stock markets and an upsurge in mergers and acquisitions. The volume of corporate activity in Britain has reached its highest level since 2001. Derivatives traders and deal makers are expected to get the biggest payouts this year, trumping their colleagues in fixed income who pocketed the lion's share of the bonus pool during the recent downturn in equity markets.

That means some areas of London and the South-west could soon see signs of a housing boom again. The upmarket estate agent Knight Frank has seen a marked upturn in enquiries for houses between £1m and £2m from City bankers, who are already plotting how to spend their multi-million pound bonuses months before they have been paid out.

Liam Bailey, the head of residential research at Knight Frank, said: "People are either buying a big pad in London or moving out into the country and commuting. Both markets were quite weak at the back end of last year and the beginning of this year. But in August and September, interest was 9 per cent higher than we expect this time of year - well above normal. No doubt we've seen an upturn in interest of City money."

While hard figures are hard to come by - banks never reveal how much they are paying out - it is a safe bet that hundreds of City bankers, the star performers, will get bonuses of at least £1m each. The total bonus pool runs to billions of pounds. In the last bonus season, from December to April, financial payouts were £1bn higher than in the previous year, according to the Office for National Statistics, which does not publish a total figure.

Employees of Goldman Sachs, which last month reported an 84 per cent increase in third-quarter earnings to a record $1.62bn (£920m), are tipped to have the largest pay day, while Merrill Lynch, Bear Stearns and Lehman Brothers have also enjoyed a good year. Goldman set aside $9.2bn for pay and bonuses in the first nine months of the year, up 30 per cent from last year, while the number of staff has risen just 6 per cent. Securities firms typically allocate almost 50 per cent of their revenue, after interest expenses, for compensation.

Some estimate that Michael Sherwood, who is co-head of Goldman's European division, is in line for a £10m bonus, while Richard Sharp, the head of the European private-equity business, could get £5m. Simon Robey, the head of Morgan Stanley's UK business, and Bob Wigley, who runs Merrill Lynch's Europe, Middle East and Africa division, are believed to be on course for £5m each.

Away from the star performers, thousands of operations and finance staff at the investment banks can also look forward to the City bonus bonanza. Neil Owen, City manager for Robert Half Finance, one of the Square Mile's leading recruiters of back-office staff, said finance workers were expecting bonuses of between 15 and 25 per cent of annual salary. "The majority of banks seem to be doing pretty well," he said. "A lot of people use their bonuses as a down payment on a house or a car, or a family holiday."

A recent survey by Morgan McKinley, the recruitment consultants, showed that nearly three-quarters of City workers expect this year's bonuses to be higher than last year's, while almost a quarter think their pay-outs will more than double from last year.

On Wall Street, the most successful bankers are likely to take home bonuses which are 12 times what they earn in basic pay, while the most modest windfalls will still be double basic salary, according to the executive search firm Options Group.

The huge payouts may well fuel sales of expensive cars, holidays and lavish entertainment. One Wall Street insider said: "The mood is pretty festive. There are some plans afoot for some serious parties."

Paul DeLucia, managing partner of Options, said the Wall Street stars who are in line for the largest windfalls include commodities traders, reflecting the volatility in energy markets this year.

Despite the turmoil at the top of Morgan Stanley, which sacked its chief executive Philip Purcell in March, the bank has notched up healthy profits and is expected to hand out generous bonuses to staff.

Together, Wall Street's largest securities houses are in line for almost $19bn in profits this year, up 8 per cent on 2004, which was at the time an all-time high, according to Thomson Financial.

One close observer of Wall Street said: "Bankers who have made money are now not taking too much risk until bonuses are declared in a few weeks' time. There are some aggressive plans for what some people plan to do with the money, but in most cases there isn't the type of conspicuous consumption there has been. People are upgrading aspects of their lifestyle." However, car dealers and party planners report some bankers are getting ready for some extravagant spending.

Bankers and traders usually find out the size of their bonuses two weeks after the end of the fiscal year. Firms including Morgan Stanley, Goldman, Lehman and Bear Stearns will announce bonuses in mid-December. Bonuses for employees at Citigroup and Merrill will be disclosed in mid-January.

One can only speculate how much time is spent lobbying for higher bonuses, or in backstabbing and the like. Bankers' bonuses are jealously guarded secrets, even within their own walls. One City insider said: "You don't get any kind of water cooler chat about what people are expecting."

Only three years ago, things looked very different when banks were struggling to make money during the economic downturn. One former trader said: "Bonus day is what everyone lives for. When people didn't get what they wanted, they sometimes went berserk." He recounts how on bonus day, he and his colleagues were called into the boss's office individually, while everyone else watched through the glass wall. He recalls that one Italian banker went berserk and was seen pacing up and down the office while shouting at the boss. He came out of the office visibly shaking with anger. When his phone rang he started banging it on the desk, then left and was not seen for three days.

This year, scenes of champagne bottles being opened and bankers splashing out on big houses or flash cars are far more likely. But their bonuses are dwarfed by some of the payouts received by top hedge fund managers. Stanley Fink, the chief executive of Man Group, is in line for a £10m bonus, while Crispin Odey, of Odey Asset Management, has already pocketed £8.8m this year. It has also been a good year for the City's smaller corporate finance firms. Dozens of executives at boutiques such as Numis Securities and Greenhill stand to land multimillion-pound bonuses on top of huge returns from the value of personal stakes in their firms.

Meanwhile, Gordon Brown's determination to close tax loopholes bodes ill for bankers. A recent court ruling makes it easier for the Chancellor to prevent City firms using employee benefit trusts to avoid tax when paying large bonuses to bankers and brokers.

Some have warned that "this is as good as it gets". John Tiner, the chief executive of the Financial Services Authority, cautioned banks against complacency last month.

A banker at a leading US investment bank said: "Everyone's had good results, but it's still not over. We've still got two months to go till the end of the year. There's a lot of biting of nails."