Much of the report released this week about the securities industry in New York City did not get covered beyond the employment or profit data. I will try to shed some light on a few of the report’s rather intriguing observations about Dodd-Frank, the Volcker Rule and bonuses.
The good news is that the analysis from the state of New York’s Office of the Comptroller (OSC), headed by Thomas P. DiNapoli, is actually about Wall Street firms and much of it hits home.
Most of Dodd-Frank Is Incomplete
The report, with the straightforward title “The Securities Industry in New York City,” cites “the Dodd-Frank Progress Report, produced by the law firm Davis Polk,” which finds that as of Oct. 1, 2012, “only one-third (127) of the rules [of Dodd-Frank] had been completed. Another 135 rules have been proposed but not finalized, and 136 rules have yet to be proposed.”
So, two-thirds of the Dodd-Frank Act is still in process and could possibly never come to fruition.
In theory, most of Dodd-Frank was supposed to be implemented one year after it became law in 2010. But most pundits and those on Wall Street knew that it would take a lot longer than year to implement such a massive overhaul.
Yet you have to wonder how much longer will it take to implement the rest of Dodd-Frank? Is this a sign that most of it is dying a slow death already? Will it ultimately be defeated because of the idiocy of regulatory bureaucracies, vicious special interest groups and the short attention span of the public?
The Volcker Rule Has Taken Its Toll
Speaking of Dodd-Frank, the Volcker Rule, “which … greatly restricts banks from engaging in proprietary trading and from sponsoring or holding an ownership stake in a hedge fund or private equity fund,” has already had an impact even though it has not been finalized and will not take effect until 2014.
“Revenues fell by 22 percent during this period [from 2009 to 2011], and by another 7.7 percent in the first half of 2012 as a result of weaker trading and investment banking activity. Expenses fell by 6.2 percent during the first half of 2012, driven primarily by reductions in compensation and interest expenses,” the report says.
The report also quantifies that “securities firms’ revenues from trading on their own accounts (including proprietary trading) have fallen off, reflecting a scaling back of activity as a result of regulatory changes and trading losses.
“In 2011, revenue gains from firms trading on their own accounts during the first half of the year were virtually erased by losses in the second half. Revenues from this source declined by 15 percent during the first half of 2012 compared to the same period last year,” according to the OSC update.
Strangely enough, this aspect of Dodd-Frank has an almost immediate impact without the input of bureaucrats, special interests, politicians and the public. Will the Virtual Volker Rule be the legacy of Dodd-Frank?
The Bonus Pool Is Being Drained
On another subject, the report also touches on the new rules of Bonus Season.
“In February 2012, OSC estimated that the cash bonus pool for securities industry workers in New York City … declined by 13.5 percent, to $19.7 billion, reflecting heavy losses in the second half of 2011 and changes in compensation practices,” according to the report. “The increased use of deferred compensation is creating a pipeline of bonuses that will be paid in future years, which will reduce volatility in industry tax payments.”
Here are some more data points:
- Compensation for the broker/dealer operations of NYSE member firms declined by 5.5 percent during the first half of 2012;
- And an OSC survey of compensation trends at “a sample of large and small financial firms” revealed that “aggregate compensation declined by 2.7 percent” during the first half of this year.
“These trends suggest that the total cash bonus pool for work performed in 2012 is likely to decline for the second consecutive year,” according to the report. The OSC adds that it is still too early to predict the level of the drop because personal income tax withholding data will not be available until early 2013.
The report does offer one ray of hope.
“While the total cash bonus may be smaller than last year, some employees may receive higher cash bonuses based on the performance of their particular business activities,” the report states. “Johnson Associates (a financial services compensation consulting firm), for example, forecasts that bond and equity traders could see the largest bonus increases, while investment bankers may see declines.”
Need a Reprint?
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