U.S. banking bounce raises pay stakes

The world is still in recession, businesses are folding and workers are losing their jobs, but this could turn out be a fruitful time for investment bankers. Nearly halfway through the year, 2009 is shaping up well for leading firms when it comes to profits and bonuses.

The last few weeks have provided evidence that the investment-banking market is heating up. Banks that see themselves as winners from the crisis, including Barclays, Credit Suisse and Deutsche Bank, have embarked on hiring sprees, offering huge salaries. In some cases, recently reviled multiyear guaranteed bonuses have re-emerged.

Meanwhile, Morgan Stanley and UBS are increasing base salaries for some. And the former set aside a higher-than-usual 68% of net revenue for compensation in the first quarter.

The cause of the excitement is a second quarter that many believe will be almost as good as the first. A recovery that began tentatively in January in the corporate-bond market has spread to most activities, including equities.

Thanks to increased volumes, wider spreads and reduced competition, analysts believe that some banks could report very healthy earnings this year. There is plenty of room for further shocks, but in recent weeks at least eight brokers have upgraded their forecasts for Goldman Sachs Group.

This rebound for investment-banking businesses would likely not have been possible without the debt guarantees, central-bank liquidity and, in some cases, government capital injections that kept the system afloat through the credit crisis.

So if the bounce back continues, the pay debate is likely to return to the fore. Proposed new rules on remuneration in the U.S., the U.K. and other financial centers are beginning to emerge, but they remain hazy.

When the TARP money was first injected into banks, the government didn’t curb pay at lenders that got bailouts.

The TARP funds now look set to be repaid. The authorities risk finding themselves in another sticky position later this year as big banking bonuses collide with continued economic misery on Main Street.

Simon Nixon