Another day, another million-dollar bonus

They've forgotten about yesterday, they're not thinking of tomorrow. Richard Thomson tells a modern-day story of American excess

Call it the fine wine feel-good index. Early last year, a bottle of Chateau Cheval Blanc in one of the upscale Manhattan restaurants frequented by the Wall Street elite would have set you back about $2,000 (pounds 1,250). The sommeliers at such establishments had never seen their stocks of high- cost wine go down so fast.

Then came last summer's financial crisis. The markets teetered on the edge of melt-down. Suddenly finding themselves looking into the abyss of slashed bonuses and lost jobs, the cuff-linked classes pulled in their stomachs and put away their wallets. Windows on the World at the top of the World Trade Center, in the heart of New York's financial district, reports that its customers abruptly switched to ordering modest Californian or Chilean at $50 a bottle.

The frugality lasted all of about eight weeks - just until it was clear that the crisis was past. Then it was back to the pricey stuff, and everyone was happy again.

After all, the economy is in an unprecedented expansion and the Dow Jones Industrial Average is topping 10,000. Wall Street has never had it so good. In 1997 nearly $11bn was paid in bonuses (on top of base salary) to the denizens of New York's financial world. Last year may have been rather lower, thanks to the market downturn in the summer, but this year is so far shaping up to be another record-breaker. Money is coming out of Wall Street's ears.

"I would say this is completely unbelievable," an investment banker said about his last few bonuses, "except that when I look at my bank account there's all this money in it." He has recently spent more than $1m on a modest three-bedroom apartment on the Upper West Side. "I could have spent more, but you have to draw a line somewhere."

His comment reflects the confused attitude of many on Wall Street to their riches. It is as if they don't quite believe their luck. Perhaps this is making them cautious. The conventional wisdom is that Wall Streeters are avoiding the radical excesses of the 1980s.

The theory, as expressed in Vanity Fair, for instance, is that this time they are "more restrained, more mature, more patrician".

This time it is less about cocaine and stretch limos and more about country clubs, perfectly tailored suits and houses in the Hamptons - the favourite summer weekend hang-out of New York's moneyed classes.

There are undoubtedly differences between now and the 1980s. In the Eighties, people borrowed up to their eyeballs. The New York property and art markets - always good indicators of Wall Street's wealth - boomed but many people were simply investors. They would pay high prices for an apartment with the aim not of moving in but of selling it for even more in three months' time. They knew they were playing with funny money and they seemed to sense that the fun had to stop sometime.

This time, the money is real. It is cash. People pay $2m for a home - they pay cash. They pay cash for new $65,000 Range Rovers, the elite car of choice now that BMWs and Porsches are only for people who don't know any better. They do not have to borrow to pay their children's exorbitant private school fees.

The Wall Street elite are spending their new money to make themselves look like old money. Take the north shore of Long Island. Highly fashionable in the 1920s (it was the scene of The Great Gatsby) it went out of style for decades. Recently, however, property prices have soared. The old mansions are being renovated and new ones are being built. Discreet country clubs with highly controlled memberships are springing up. The members tend to be bankers, brokers and hedge-fund managers in their thirties and forties dressing, talking and acting as if their families had lived there for generations.

They don't flaunt their wealthy little communities. They prefer outsiders to stay well outside. The banks and brokerage firms encourage this kind of discretion, as if flaunting their massive profits is bad for business. Ever since a young Morgan Stanley employee boasted about his income to The New York Times and was promptly fired from his job, Wall Street people do not like to go on the record about their wealth.

Yet on closer examination, the supposed contrast with 1980s brashness looks only skin deep. The real difference may simply be that ever since the 1980s we have got more used to multimillion dollar pay packets. And the hundreds of millions that 20-year-old Silicon Valley whiz kids are worth makes a $5m or $10m Wall Street bonus look positively feeble.

The truth is that Wall Street bonuses are many times higher than they were 10 years ago. Even John Gutfreund, the former chairman of Salomon Brothers and the high priest of 1980s excess, feels it. He recently called pay levels "unseemly".

"Maybe it's OK to make a million or two. But when you get to $25m or $30m, it's hard to figure. What basis is there for that?"

To earn these sums, though, bankers and brokers are working harder than ever. A 15- or 16-hour day is commonplace, month in, month out, for bankers in their twenties and thirties.

"I figure I can do this until I'm about 40, when I'll have enough to retire," says one banker. That was a realistic goal for the biggest stars of the 1980s but in the 1990s it has become an accepted career path even for those further down the food chain. You do not have to be anything very special to pull down more than a million a year these days.

But there is a price to all this. The money may be flowing like water, but the pressure to perform is more ruthless than ever. Take the example of the Morgan Stanley analyst who said Amazon.com's shares were overvalued, contradicting a rival at Paine Webber who said they were undervalued. When Amazon's shares soared the Morgan analyst was swiftly out of a job, to be replaced by the man from Paine Webber.

There is evidence that such obsessive competition coupled with the promise of untold riches is fostering a culture every bit as reckless as the 1980s. The collapse of Long Term Capital Management, the hedge fund, is a good example. Leveraging its $4bn in capital to a market exposure of $1,250,000bn constitutes extreme recklessness in any era and it paid the price when the markets tanked last year.

But for the most part, "reckless" depends on how you view the US stock market. Wall Street's wealth is driven by this market above all. If you believe that old economic models have been overthrown, you will not be worried by price-to-earnings ratios of 80 times or more on many company shares (and infinity for some internet companies which make no profit). You will think that investing in this environment makes perfect sense. Many top-notch banks such as Goldman Sachs officially support this view. Others take a simpler approach: their investment strategy, if you can call it that, is not to look a gift horse in the mouth. And yet everywhere on Wall Street there is a nagging uncertainty.

"This is a bubble," says Julia Liu, a hedge-fund manager. "These valuations make no sense and cannot last."

Warren Buffett, the investment guru, seems to concur: he is 30 per cent invested in highly liquid assets - a sure sign he has little confidence in the market.

Still, there is no arguing with rising prices. There are precious few analysts or fund managers left any longer who dare to bet against it. Too many who have done so have lost their jobs.

Besides, apart from last summer's glitch, the relentless market rise has redefined the concept of risk. It just doesn't seem to exist the way it used to. A clear manifestation of this is the proliferation of hedge funds, of which there are now several thousand. Since the mid-1990s, it has become a standard career move for thirtysomething investment bankers to leave the big Wall Street firms and set up on their own. Investors are easy to find, the management fees are spectacular and in these conditions it is hard not to make impressive returns.

More telling than what they do professionally, however, is what they do with their personal money. Here too, many of the most senior Wall Street veterans are going with the notion that they cannot lose. When Long Term Capital Management collapsed, for example, it emerged that a slew of well- known banks had lent it hundreds of millions with no questions asked. But it also turned out that many executives such as David Komansky, head of Merrill Lynch, had also put their personal savings into the fund. All those millions in bonuses are, it seems, going straight back into the market. After all, when you have bought everything you can possibly want, what else is there to do with that much money?

Wall Street has perhaps learned how to spend its money with more style than in the 1980s. It has also learned to operate in far more complex, sophisticated, international markets than ever before. But its greed is more insatiable than ever. And its willingness to risk its own money, the money of its clients and, ultimately, the wealth of the country has never been greater.

Whatever reservations many bankers privately hold about the overpriced stock market, they are not letting that get in the way of making money. Which is why the market continues to go up and up. Until, of course, it reaches that unknown moment when it starts to fall.