Stung by Losses, Main Street Investors Fail to Notice Market's Rebound

Although the memory of Lehman Brothers’ 2008 collapse may be fading on Wall Street, the shock still lingers on Main Street—and may again be hurting ordinary investors. A new survey of individual investors is a reminder of just how much we are primal creatures that remember the pain of loss more than the joy of gains.

As my colleague Roben Farzad recently reminded us, the Standard & Poor’s 500-stock index is on a tear, rallying on rising corporate profits (including Apple’s (AAPL) earnings bonanza) and optimism about further help from the Federal Reserve. Since its nadir in March 2009, the S&P 500 has more than doubled and is now at 1,463, not that far from the all-time high of 1,526 it reached in September 2007.

But ask Main Street investors, and you find that the market isn’t all roses: Memories of the steep losses from 2008 and 2009 still haunt, causing them to underestimate the market’s performance.

Franklin Templeton (BEN) surveys individual investors annually, asking how they perceive the market’s performance in the previous year. In 2010, 66 percent of investors said the S&P had fallen in 2009, when it actually had gained 26.5 percent—in a year following a steep 37 percent plunge. In 2011, 48 percent of investors said the markets were down over the course of 2010, when the S&P had risen more than 15 percent. And data just released on Sept. 18 shows that 53 percent of investors think the S&P declined in 2011, when the index actually rose 2 percent.

It’s fair to wonder if investors who don’t know whether the S&P made or lost money the prior year are sufficiently attuned to the market to risk cash in it. However, Franklin Templeton’s survey is also a marketing exercise—the company is a major mutual fund seller that would like to help guide you into investing.

The S&P has gained more than 16 percent so far this year, but that’s no reason to to think investors have suddenly overcome their post-crash trauma. They have continued pulling out of equities, taking more than $66 billion (XLS) out of the U.S. stock market in 2012.

This fear of getting burned again—“loss aversion,” in financial psychology lingo—means that Main Street is being hit by a double whammy. Not only did individual investors take a beating when the market tanked, they’re not benefiting from its rebound, either.

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Charities Still Love Wall Street Bankers

The master of ceremonies made a mistake as he named John Thain one of the year’s best dads, introducing him as the chief executive officer of Citigroup (C). “Vikram Pandit will be very unhappy,” Thain responded, accepting an award from the Father’s Day/Mother’s Day Council on June 14. “I’m actually the CEO of CIT (CIT), which is similar, but not quite the same.”

The confusion was understandable. Pandit was saluted by charities three times in June. And in the past two months more than a half dozen current and former bank chiefs have been honored in New York, including Bank of America’s (BAC) Brian Moynihan, JPMorgan Chase’s (JPM) Jamie Dimon, and Morgan Stanley’s (MS) James Gorman. On May 1, a day of international protests against Wall Street, Goldman Sachs Group (GS) President Gary Cohn accepted an award for the firm from Friends of the High Line, which supports the park on Manhattan’s West Side. Hen-of-the-woods mushrooms and slow-braised short ribs were served. Cohn said Goldman Sachs and its employees have given more than $6 million to the park. “Look, the whole idea of these things is to raise money for the charity,” said Thain in an interview after accepting his Father of the Year award. “The demonization of Wall Street and bankers is very much a function of the press and of Washington, and not much more broadly held.”

Nonprofits often honor bankers because of their donations, says Naomi Levine, executive director of New York University’s George H. Heyman Jr. Center for Philanthropy and Fundraising. “Does this make me happy? No, it doesn’t. I look at what some of the banks and other insurance companies have done to the American economy and I’m not comfortable with it,” she says. “You try to balance your criticism of some of the things that Wall Street has done with the need.”

Pandit was the most frequently feted of the bank CEOs. A trio of June salutes began with Chaka Khan singing I’m Every Woman and Lionel Richie performing Three Times a Lady at a gala for Harlem’s Apollo Theater. Pandit got a corporate award in recognition of the company’s support—$1.6 million to the Apollo Theater Foundation since 2002, according to Elizabeth Fogarty, a bank spokeswoman. Former Citigroup Chairman Richard Parsons heads the foundation’s board.

A 22-piece Latin band and the singer Josh Groban performed when Pandit was honored on June 7 by Boys & Girls Harbor, which runs a music conservatory and school programs in Harlem. The bank and its foundation have given more than $500,000 to the group since 1972, Fogarty says. She says the lender has given the same amount since 2005 to the Museum of the City of New York, which presented Pandit with a leadership award at a June 18 black-tie dinner, where guests had a private viewing of an exhibition on the history of New York banking. Citigroup is sponsoring the show to mark the firm’s 200th anniversary, according to a press release.

“Citi has had a long and fulfilling relationship with these institutions, and it is especially meaningful to be honored during our 200th anniversary,” Pandit said in an e-mail. Citigroup shareholders rejected Pandit’s $15 million pay package for 2011 in a nonbinding vote in April. The company’s stock has plunged more than 90 percent since he became CEO in December 2007.

Dimon was named executive of the year by the University of Rochester’s Simon Graduate School of Business at its May 3 conference, “Economic Action and the Management of Risk.” The honor is given to a leader who “demonstrates a deep respect for our nation’s fiscal health,” according to the school’s website. A week later, Dimon disclosed a $2 billion trading loss in a division that helps manage the firm’s risk. “The developments don’t change our fundamental assessment,” Mark Zupan, the school’s dean, said in an e-mail. “If anything, the manner in which Mr. Dimon has handled the adversity only has increased our esteem for him.” The award wasn’t given because of donations, Zupan said.

Dimon was celebrated again on May 24 at the Salute to Freedom gala, an annual fundraising dinner for New York’s Intrepid Sea, Air, and Space Museum held on the hangar deck of the landmarked aircraft carrier. “To all the active military members and veterans in the room: I’d go into the foxhole with any of you, and I hope I wouldn’t let you down,” Dimon said, according to a transcript of his remarks. Last year the bank agreed to pay $56 million to settle claims that it overcharged soldiers on their mortgages and improperly seized the homes of active-duty military personnel. Dimon said then that he and the bank “deeply apologize.”

Morgan Stanley’s Gorman and Bank of America’s Moynihan were lauded the same day Dimon was named best executive. Wearing a tuxedo on the roof of the St. Regis Hotel, Gorman received an award from International House, a New York residence for graduate students. Moynihan was honored by the American Ireland Fund in a Lincoln Center tent.

At the Father of the Year awards at the Sheraton New York Hotel, host Mark Shriver apologized for bungling his introduction of Thain, who has been CEO of CIT Group since February 2010. “I thought it was a misspelling,” said Shriver, senior vice president of nonprofit Save the Children. “It said CIT—I’m like, this has got to be Citi.” As CEO of Merrill Lynch, Thain arranged its 2008 sale to Bank of America and left after Merrill’s $15 billion loss forced the combined firm to seek more government support. After the event, he said the importance of raising money for charity overshadows potentially awkward conversations about business. “I don’t really mind people asking me questions,” he said. “Whatever happened in 2008, 2009, there’s lots and lots of misinformation, and things that are just wrong, but I’ve never minded talking about it.”

The bottom line: Charities have honored more than a half-dozen current and former high-ranking Wall Street banking executives since May 1.

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Chris Foley, Jester of Wall Street

Chris Foley was so stressed working as a stockbroker that in 2008 he started getting Botox injections in his armpits to reduce perspiration. He developed rashes and suffered through a monthlong bout of diarrhea. His body, he says, was telling him he was in the wrong profession.

Photograph by John Loomis for Bloomberg Businessweek

Foley tells this and other stories in his one-man show, Off the Desk (Tales of a Mediocre Stockbroker), which he performed on May 8 and 9 at the Barrow Group Theater in New York. The show recounts his experiences in finance and lampoons the bullies and chauvinists he encountered. “The year I made the most money, I’d never been more unhappy,” he says in an interview.

John Loomis for Bloomberg Businessweek

For 7 of his 13 years on Wall Street—which included jobs at Lehman Brothers and other major firms—he moonlighted as a stand-up comedian in New York clubs. The lure of financial stability kept him at desk jobs until he was laid off in 2010. Foley took it as an opportunity to give acting a shot. Like most novice performers, he faced a lot of rejection. Casting agents tended to see him only in cop roles.

So he wrote, rewrote, and rehearsed with his acting teacher. “I rehearsed to the point where I was almost numb,” says Foley, now 38.

Photograph by John Loomis for Bloomberg Businessweek

Both performances of Off the Desk sold out at the 100-seat theater. Foley hopes to take the show to other cities. He is also working on ideas for a television series using characters from his act.

“You can be mediocre in Wall Street and still make a low-six-figure salary,” he says. “In acting, if you’re mediocre, it won’t work. You have to be great.”
FOLEY’S BEST ADVICE
1. Leave your apartment
After losing my job, I had to get out of my head, stay active, and avoid being isolated in my apartment. Good distractions: long walks, free museum tours, meditation, and yoga.
2. Make your pennies scream
I figure out what I need rather than what I want and cut back on spending. I cook at home more often and use the subway everywhere I go in New York.

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Another Woman Loses a Top Spot on Wall Street

Add Ina Drew to the list of prominent Wall Street women who have left their jobs. JPMorgan Chase said today that Ina Drew, head of the bank’s chief investment office, is retiring, following the disclosure of a $2 billion trading loss. The bank’s chief executive, Jamie Dimon, had urged her unit, which invests the bank’s cash, to make riskier bets to boost profits, Bloomberg News reported, citing five former executives. Drew had a 30-year career at the bank and rose to be one of two women who were part of the bank’s powerful operating committee.

The ranks of female execs on Wall Street were thin even before the financial crisis, and Drew’s exit follows a string of female executive departures. In June of last year, another Dimon lieutenant, Heidi Miller, the former head of JPMorgan Chase’s international operations, announced plans to leave the bank. Last fall, Sallie Krawcheck, who ran Bank of America’s wealth management division, left the bank as part of a management reorganization. She got a $6 million severance package and stayed out of the public eye for months until reemerging this spring as a frequent tweeter.

The financial crisis precipitated other high-profile departures. In June 2008 Lehman Brother’s chief financial officer, Erin Callan, lost her job as investors questioned the firm’s finances before it collapsed. Zoe Cruz, a former co-head of Morgan Stanley, was ousted in 2007. (Bloomberg News reported last week that Cruz is liquidating the hedge fund she founded after leaving Morgan Stanley.)

Krawcheck recently told Marie Claire that while women have senior roles in about 15 percent of corporations, the number falls well below 10 percent on Wall Street. “We are significantly underrepresented there,” she said. Women are more than half of the workforce in the financial sector but are chief executives at fewer than 3 percent of U.S. financial companies, according to Catalyst, a nonprofit dedicated to working with women in business.

Krawcheck said that Wall Street should rethink how best to develop female leaders:
“We’re putting women on diversity councils; we’re putting them in mentoring programs; we’re giving them special leadership training, telling them how to ask for promotions—but we are not promoting them. My goodness, we’re just making women busier.”

Beyond advancement, pay for women in the finance sector is not on a par with men’s either. Census data show that financial jobs have a bigger earnings gap than other fields. In some jobs, such as financial managers, women make from 55? to 62? for every $1 a man earns. There’s no word yet on Drew’s severance.

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Estimize, a Crowd That Beats the Street

Every three months, Wall Street performs a ritual dance known as quarterly earnings. It goes like this: A company undersells its own expectations. Analysts at brokerage firms, not wanting to alienate a corporate client, follow its lead and give out lowball estimates. Then reported earnings top estimates and the stock price rises, at least temporarily. Since 1994, according to Bianco Research, more than half of the companies in the Standard & Poor’s 500-stock index have topped the median analyst estimate (as collected by Bloomberg LP, the parent company of this publication) in every quarter but four. So far, for the first quarter of this year, 79 percent have “beat the Street.”

Leigh Drogen is out to change the routine. The 26-year-old Chappaqua (N.Y.) native has created an online clearinghouse for earnings estimates called Estimize. The site gathers estimates from all corners of the investment world, from the so-called sell-side analysts at the banks, who have been calling the tune for the past three decades, to their buy-side counterparts at hedge funds and proprietary trading desks, to independent investors. While estimates have been crowdsourced since before there was such a word, Estimize, says Drogen, is a new form of crowd control. “We are able to put forth the guys who are actually the best analysts,” he says, “vs. the guys who are just the loudest or have the biggest names behind their desks.”

Anyone can contribute to Estimize by signing up for a free account. More than 4,300 people have done so since Drogen launched the site in December, with about 77 percent self-identifying as independent, 20 percent as buy-side, and 3 percent as sell-side. Once inside, members can look up a stock and then move toggles to enter their guesses for earnings per share and revenue. There is also a space to include analysis. Estimize aggregates the entries and posts them next to a “Wall Street” number taken from Zacks Investment Research, which uses the “average of all the current estimates made available by brokerage analysts.” So far, says Drogen, his ragtag crew is besting the usual suspects. In the first quarter of Estimize’s life, the crowd’s estimates have been closer to reported results 63 percent of the time. This covers 120 sets of earnings for which Estimize had at least four estimates.

The Estimize crowd anticipated Research In Motion’s (RIMM) underwhelming fourth-quarter revenue, predicting $4.48 billion while Wall Street guessed $4.54 billion. The BlackBerry maker came in at $4.19 billion. And it expected Intel’s (INTC) better-than-expected results for the fourth quarter. Estimize predicted 66 cents in earnings per share; Wall Street, 61 cents. Intel came in at 64 cents. Admittedly, this is cherry-picking from a small sample size, but that, says Drogen, is part of the point. Estimize can not only help correct for corporate spin, or “guidance” as it’s known in the business, but, by opening its doors to all comers, it can help spot unknown talent. The site provides an analyst leaderboard for each stock and a track record for each analyst. Drogen points to Rob DeFrancesco, or TechStockRadar as he is known on Estimize, who has been more accurate than the Wall Street consensus on 11 of his 13 estimates so far and the most accurate analyst on the site for seven of them. “His ability to do this is pretty ridiculous for a guy who just runs his own book,” says Drogen.

Estimize is not the first attempt to bridge the gap between the official consensus and what the financial community really thinks about earnings. For as long as corporations have been gaming the system, analysts (including the very sell-side gang responsible for the deflated numbers) have been circulating another, usually slightly higher, figure called the “whisper number.” Drogen participated in this traffic when he worked at the hedge fund Geller Capital from 2006 to 2009, and later at his own fund Surfview Capital, where he crafted investment strategies around the reliably “skewed set of expectations” produced by the sell-side. Drogen left Geller to work at Howard Lindzon’s social finance pioneer StockTwits, where he noticed that many in that community were already sharing earnings estimates. He offered to build a platform for aggregating the numbers inside StockTwits. Lindzon passed but gave his blessing for Drogen to build it on his own. So Drogen raised $200,000 from a handful of investors and started Estimize.

WhisperNumber has been publishing unofficial estimates since 1998. The New Jersey-based company gathers its numbers from a group of anonymous investors who register with the site, runs these figures through “a proprietary algorithm,” and shares the results for free with its 85,000 users. (The company also sends tips based on its data about how stocks are likely to move on earnings to a smaller set of users who pay about $800 a year.) WhisperNumber’s president, John Scherr, says he has seen plenty of upstarts come and go. “I think he’s a bit late to the party with this,” he says of Drogen’s Estimize. “It’s a nice attempt, but I don’t think it’s going to fly.”

Drogen says he’s not out to topple WhisperNumber or anyone else in the business so much as roll them all into one big, transparent bag of numbers. “What we’re trying to disrupt here is the idea that the whisper number is a whisper number,” he writes in an e-mail. “We want it to be open and transparent where you can see exactly who it’s coming from and how the sausage is created. We actually pull their estimates into our site. We want people to know about them. They are just another data point.” (Scherr has since asked Drogen to remove the WhisperNumber data from Estimize. Drogen says he’ll comply.)

Estimize does allow users to remain pseudonymous, which Scherr suggests undercuts Drogen’s rhetoric of transparency. “If you’re going to go the transparency route, you’ve got to use real names,” he says. “If you’re right, you want to be known, but most people aren’t right. Most people are wrong. And nobody wants to be known as the guy who has a 50 percent accuracy rating.” But the pseudonymous Web, says Drogen, is the future. “We don’t care that you don’t identify yourself as who you are in real life, as long as you create a track record,” he writes by e-mail. “It allows 18-year-old kids who are amazing traders to share their ideas, and be recognized for the quality of what they are sharing,” which is why the site is now hosting a $10,000 challenge for the best estimators.

If all goes according to plan, Drogen will eventually make himself obsolete. As estimates get closer and closer to results, the trading opportunities disappear. “If we’re successful at this, we take a massive amount of volatility out of the market,” he says, “and we’ll be happy if we disrupt ourselves, we’ll be really happy that we succeeded.”

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Wall Street Said to Weigh Junior Banker Pay Freeze

Zynga IPO Outlook July 7 (Bloomberg) -- Michael Yoshikami, chief investment strategist at

July 7 (Bloomberg) -- Michael Yoshikami, chief investment strategist at YCMNet Advisors, Bob Rice, general managing partner at Tangent Capital Partners LLC, Paul Martino, managing director at Bullpen Capital, and Paul Bard, director of research at Renaissance Capital LLC, talk about Zynga Inc.'s plan to raise $1 billion in an initial public offering and the outlook for the company. (Excerpts. Source: Bloomberg)

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Wall Street Weighs Pay Freeze for Junior Bankers

January 11, 2012, 12:46 AM EST By Jeffrey McCracken and Christine Harper

Jan. 10 (Bloomberg) -- Wall Street’s biggest firms, facing a slump in investment-banking revenue, are considering freezing compensation levels for some junior bankers, according to people familiar with the deliberations.

Credit Suisse Group AG is likely to suspend its practice, an industry norm, of boosting pay automatically each year for analysts, associates and vice presidents within the investment- banking division, a person with direct knowledge of the decision said. While those employees will get their regular annual salary increases, bonuses probably will be lowered to keep total pay flat from a year earlier, said the person, who requested anonymity because the plan isn’t public.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are being watched by competitors for signs the companies are planning similar moves, said people at four other firms. Cutting pay can be perilous if your rivals don’t because it’s easier for junior bankers to defect, draining a future generation of talent. Wall Street firms may make the change en masse only if one or more of their biggest rivals act first, the people said.

“There’s always the risk that people may go across the street for a better deal,” said Joseph Sorrentino, a managing director in New York at Steven Hall & Partners, an executive- compensation consultancy. Among junior bankers “you have some potential future stars and you want to make sure you keep them engaged and keep them happy and performing.”

JPMorgan, which doesn’t plan to alter its practices, may change course if other firms do so, a person briefed on its decisions said.

Starting Salaries

Base pay for junior bankers typically increases automatically by about 15 percent to 20 percent, akin to a unionized salary scale, as they work a year and move up a so- called class. Younger bankers, who typically comprise about 75 percent of the investment-banking workforce of the biggest Wall Street firms, often start with a $200,000 annual salary and can expect $240,000 or $250,000 in the second year, said two senior bankers.

JPMorgan’s investment bank, which includes equity and fixed-income trading, had 26,615 employees as of Sept. 30. Goldman Sachs, with 34,200 employees, doesn’t break out how many work in each division.

A banker typically spends three to four years as an associate and then three years as a vice president before he can be named director. Top-producing vice presidents in their third year, sometimes called a VP-3, could get $600,000 to $700,000 in total compensation, said a senior Wall Street banker.

Top Tier

At Deutsche Bank AG, senior executives are evaluating whether to cut or freeze pay for the top tier of vice presidents as a way to pare all junior-banker pay, said a person familiar with the matter.

Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment, as did Lucas van Praag at Goldman Sachs, Victoria Harmon at Zurich-based Credit Suisse and John Gallagher at Deutsche Bank, based in Frankfurt. JPMorgan and Goldman Sachs are both based in New York.

The review of junior-banker pay focuses on investment- banking divisions and not lower-level employees in equity or fixed-income trading departments, the people said.

Associate compensation continued to rise in the wake of the financial crisis, the executives said. Starting pay for each position also increased, so a first-year associate job that paid $200,000 a year rose to $210,000 for the next person to fill the slot. With compensation pools down this year at almost all Wall Street banks, climbing associate pay has caused a squeeze on pay for senior managers, said a banker involved in such decisions.

More Transparent

Pay among junior bankers tends to be more transparent and aligned with peers at competing firms than it is for senior bankers, the people said, partly because the newest employees still talk with former classmates. Word of lower entry-level pay at one bank can hinder recruiting at top business schools, which is why the biggest banks rarely consider such pay freezes.

A plunge in trading revenue last year, stagnating economic growth and Europe’s sovereign-debt crisis have forced Wall Street’s most senior bankers to rethink their pay practices as they seek to cut costs. Part of the calculus is determining whether the downturn in bank profits represents a permanent shift or a temporary phenomenon tied to the 2008 financial crisis and recession.

Compensation at the biggest banks may fall 20 percent to 60 percent this year, depending on the firm and the job, senior bankers said. Mergers-and-acquisitions bankers may face pay cuts at the lower end of that range and those in fixed income or trading could see higher reductions, senior bankers said.

Dimmed Prospects

Most of the biggest U.S. banks will inform employees about bonuses and compensation at the end of this month. Bank of America Corp., for example, will tell employees their compensation starting Jan. 26, said a person familiar with the matter. The new pay rates typically take effect in February.

Goldman Sachs and Morgan Stanley, the major U.S. banks most reliant on trading, had their earnings estimates cut this month as a weak fourth quarter dimmed prospects for a capital-markets rebound in the first half of 2012.

JPMorgan Cazenove analysts led by Kian Abouhossein cut earnings outlooks for investment banks for 2011, 2012 and 2013, citing worsening conditions in fixed income and equities. In a Jan. 6 note to clients, the analysts lowered their Goldman Sachs 2012 earnings estimate by 19 percent and Morgan Stanley’s figure by 17 percent.

Investment-banking and trading revenue probably has dropped in each of the past two years. In 2011, global stock offerings plunged 29 percent from 2010 and U.S. bond issuance fell 6.7 percent as companies delayed plans to raise capital, according to data compiled by Bloomberg.

Final Decisions

Fixed-income trading revenue at U.S. banks may fall 12 percent from the third quarter, minus accounting adjustments, while equities drop 10 percent and investment-bank revenue remains unchanged, David Trone, an analyst at JMP Securities, wrote in a Dec. 16 report.

Some large European banks won’t make final decisions on bonuses and compensation until early next month, allowing them to tweak plans based on what their rivals determine in January, executives at those firms said.

Pay increases have traditionally been automatic because “there are traditionally very long hours in terms of the amount of work and this is another way to try to boost their morale and signify that they’re a strong part of the firm and that they’re appreciated,” said Steven Hall’s Sorrentino.

Deutsche Bank won’t announce internally in North America its bonus and compensation decisions until at least the first week of February, said a person familiar with the matter, who predicted bonuses to be down there 30 percent to 50 percent. Barclays Capital, a unit of London-based Barclays Plc, is likely to hold off until the second or third week of February, a person familiar with the matter said.

Kerrie-Ann Cohen, a Barclays Capital spokeswoman, declined to comment.

--With assistance from Dawn Kopecki in New York. Editors: Peter Eichenbaum, Steve Dickson

To contact the reporters on this story: Jeffrey McCracken in New York at jmcracken3@bloomberg.net; Christine Harper in New York at charper@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; David Scheer at dscheer@bloomberg.net

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