City gets jitters as bonus time draws near

It is mid-November. The nights are drawing in, and in the City staff are getting nervous about bonuses. Last year was a bumper year as the markets roared away on the back of the internet boom. Then, payouts were anything up to 40 per cent higher than 1998, and dozens of senior City bankers found themselves catapulted into the millionaire league.

It is mid-November. The nights are drawing in, and in the City staff are getting nervous about bonuses. Last year was a bumper year as the markets roared away on the back of the internet boom. Then, payouts were anything up to 40 per cent higher than 1998, and dozens of senior City bankers found themselves catapulted into the millionaire league.

This year, though, with markets choppy and business drying up, expectations of multi-million pound payouts are sharply down.

Consolidation in the industry - which in a matter of months has seen Credit Suisse First Boston snap up Donaldson, Lufkin Jenrette; Chase Manhattan buy Fleming and JP Morgan; PaineWebber going to UBS and Wasserstein Perella bought by Dresdner Kleinwort Benson - is threatening dramatically to alter the traditional terms of trade.

Although there are still firms out there like Bear Stearns and ABN Amro hiring or "building", the shake-out is already having an effect. As one broker put it yesterday: "If you are at Goldmans and they don't give you a big bonus, where are you going to go?"

Private equity firms are no longer hiring as aggressively as they were, while quitting to join a dot.com start up is not exactly this year's thing. It says a lot that many bankers have been jumping ship this autumn at a time when in normal years they would be sitting tight until bonus season is out of the way.

One analyst said yesterday: "Bonuses are going to be OK. But I don't think they are going to be stratospheric."

There is the odd exception, like Dresdner Kleinwort Benson, where the bank's German owner was panicked into setting aside 490m euros (£294m) for guaranteed bonuses to stop the firm imploding in the wake of the collapse of the attempted merger with Deutsche Bank.

The top tier at firms like Flemings and DLJ which have been taken over will have little to fear. They have been locked in with guaranteed options and bonuses. But, lower down, anxiety is rife. So far, since the takeover, two-thirds of DLJ staff at managing-director level have gone.

Mike Baliman, a consultant, whose firm Penates advises the securities industry said: "The terms of trade are slowly moving in favour of employers because there are fewer banks."

As yet no one is expecting the kind of fall-out seen in 1998 when, in the wake of the bail-out of Long-term Capital Management, the US hedge fund, blue-chip firms like Merrill Lynch laid off staff by the thousand only to regret it six months later when business took off once more.

Firms like Goldman Sachs and Morgan Stanley, which set the pace, are due to announce bonuses within the next few weeks. The whispering campaign has already started and the message is coming out that this is not going to be a vintage year. The European firms usually pay out in February or March.

Bad news then for the Porsche dealers and Docklands estate agents for whom City bonus season is normally big business - although in an industry where £1m packages are not unusual, belt-tightening is always relative.

"People are pretty nervous," said one analyst at a blue-chip firm. "Everyone is less optimistic but that is no surprise given where we are."

New listings, which until mid-way through the year were going gangbusters, have slowed sharply, and the outlook for the first quarter is not good. Mergers and acquisitions business is generally still buoyant but down on the peak.

Secondary markets, however, are stagnant and volumes low. High-yield bonds - once the hottest of hot sectors - has been dead for most of this year.

Third-quarter profit numbers at the investment banks have been good by historical standards but generally down on the first and second quarters.

The outlook, though, is not that strong. Wall Street analysts have been taking their pencils to their fourth-quarter forecasts, although some admit they are probably still too bullish by half. In the good times, cost bases have swelled. CSFB, since the DLJ takeover, has more than a hundred bankers in its telecoms team alone.

One banker said: "We reckon they cost around $1m [£700,000] each to service. That takes a heck of a lot in fees to service."

Much of that growth has been fuelled by expectations that over the next few years, Continental European M&A will pick up where the US left off. But the past few weeks has seen activity fall off a cliff. The £100bn Vodafone takeover of Mannesmann already seems a distant memory.

The value of European M&A deals in October was $65bn, according to Thomson Financial, down from $106bn this time last year. September too was down - from $86bn in 1999 to $66bn. November is unlikely to be much better. Volatile markets are not good for deals.

More worringly still, there has been the odd nasty surprise. Morgan Stanley has had to write down the value of some of its high-yield bond holdings following a buyers' strike by investors in corporate bonds.

Earlier this week, Bank of America, which has just poached 29 European equity research staff from DLJ, announced in a filing with the US Securities and Exchanges Commission that it expected to double its bad-debt provisions in the fourth quarter following a couple of bankruptcy filings.

One banker said yesterday: "I know bonuses are supposed to be historic, but, when deciding what to pay, managements are bound to take account of where they see things going. If things are going to get tough they may want to keep something in the cupboard for next time."