Sunday, April 26, 1987
Business Section, 3:1:2
By BROOKE KROEGER
EVERYONE earning more knows it, but it comes as a shock to those earning less: The New York investment bankers under 30 with staggering $600,000-a-year incomes are not rich and may never be.
Investment bankers tend to play down the importance of how much they make, emphasizing instead the fierce competition that drives them and the intense pressure of their work. Success is what they seek, and their incomes are just a way of keeping score. They can measure their accomplishments by how fast they become partners or managing directors in their firms, by how many job offers they get and by how much their peers respect them.
But money is the focus of their world. It has almost no other product or service. They are not doctors who save lives or manufacturers who produce spark plugs or house paint. For an investment banker, accumulating wealth is what validates achievement and spending it demonstrates success. ”There is a tendency to spend a lifetime looking into the checkbook,” said a 38-year-old investment banker, who knows. ”The bigger the number, the better I feel.”
The urge to spend, once turned on, can be overwhelming, as interviews with investment bankers, real estate agents, co-op board members, travel agents and art and car dealers attest. It is intensified by what they see their colleagues buying and by the opulent life styles of some of the people they do business with.
The strong sense in the investment banking community is that earnings cannot possibly stay at their current level. So for the young just starting to achieve success, for those just buying their first $1 million co-ops, the cost of matching their success with more and more possessions may outstrip the incomes they will be able to sustain over the course of their working lives.
”They can ape the styles of the rich and famous to a certain extent,” said Richard Zorn, of the investment firm Balis Zorn Gerard Inc. ”They earn $600,000 and spend $400,000 out of pocket. There’s the house in Southampton and the nanny and entertaining and art and the wardrobe. But when the Joneses they are keeping up with are the Basses, it comes to the executive jet and the yachts and the sapphires and the million-dollar paintings and it’s all over. What it means is that $10 million in liquid capital is not rich.”
In a few instances, the sense of not being truly rich could explain, at least in part, how investment bankers earning large incomes could have felt the need to amass even more, even if it meant breaking the law.
The past two years have been a bonanza for invesment banking. Salaries have stayed about the same -in the $150,000 range for managing directors and less down the hierarchy – but the bonuses have been huge, bringing earnings last year for the most successful into the $500,000 to $1 million range. The majority earn far less, but a few earn even more.
SEVERAL of those interviewed took pains to point out how careful they are in their own spending habits; it is always another colleague they know who has leveraged himself to the brink. And yet the signposts of their own successes all are in place. They might abhor flashy jewelry but take Christmas in Antigua; disdain Park Avenue as too pretentious but live in the most luxurious buildings on Central Park West.
”The accumulation of wealth is in and of itself just as important in defining yourself as what that wealth can buy,” said a 26-year-old who has been working as a research analyst at a major New York investment bank for the past 18 months. ”I think in our society we’ve sort of reduced ourselves to an equation where net worth equals self-worth.” The heroes of his generation, he said, were not the Rev. Martin Luther Kings. They were T. Boone Pickens, Ivan Boesky and Steven Jobs.
Does this reflect his own feelings? ”I certainly hope not,” he said. Others say that dealing every day in figures with as many digits as telephone numbers alters the young investment banker’s psyche.
”It becomes your talking universe,” said one woman, 33, who has been an investment banker for three years. And remuneration in the hundreds of thousands can start to seem paltry. ”Within the world you are operating in,” she said, ”you find that your expectations for high bonuses swell in relation to the numbers you are seeing all year long – the deals, the fees, the money. So your base salary becomes pocket money and spending becomes a matter of manifesting your bonus.”
Kenneth Schuman, a former New York City Commissioner for Economic Development, spent about a year and a half at Lehman Brothers before it was bought out by Shearson/ American Express in 1984. He found he was not ”money-motivated” enough to make investment banking a life’s work, and went on to form a land investment firm called Affordable Living Partnership.
”There’s no question in my mind that there’s a real trap,” he said. ”You tend to live up to your income level. You see it in relation to the people of your category. They’re living in a certain way and you want to live in that way. You keep up with other people of your situation who have also leveraged themselves.”
Some people entered the invesment banking world planning to put away a tidy sum and then move on to other things. But after the commitments to co-ops and country homes begin, the obligations take on a life of their own and plans to leave the securities industry get pushed farther and farther into the future.
”If you ever decide you want to leave, you would have to sacrifice so much in income it wouldn’t be feasible,” said Mr. Schuman. He said he got out of investment banking before his earnings soared to avoid that trap.
As the earnings grow, so do the appetities. ”It’s like a friend of mine is fond of saying,” said a 38-year-old banker, who asked not to be identified. ” ‘I never knew how poor I was until I had a little money.’ ”
”The average guy who has sort of made it is worth a few million,” said the banker, who surpassed the average himself several years ago. ”He has a $1 million to $2 million co-op. He’s 40 to 42 years old. He works like a dog . . . These people are chasing the same things: co-ops, houses in Southampton, art, maybe a co-op in Aspen, an East Side apartment. Then he comes to think about moving from the 8-room to the 16-room and it’s a whole different society.”
A lot of the trappings of wealth, can be had for what in these circles amounts to pocket change: private schools for children, designer clothes, drivers, nannies, housekeepers, Christmas in Antigua, spring in Aspen, May and October in Europe, luxury cars, boats and even six-seat private planes.
It is real estate that creates the great divide.
”People today don’t earn money, they earn apartments,” said the 38-year-old investment banker, who paid cash for his 8-room co-op apartment and his $400,000 weekend house. ”Denominate in terms of co-ops. If you earned $100,000 a year in 1977 and a co-op cost $200,000, and you earn $500,000 today, it’s still half a co-op.”
PHYLLIS Koch, whose real estate firm is noted for sales on the Upper West Side, explained what she said was the current rule of thumb for purchases in the most prestigious buildings on Central Park West. Most buildings generally allow buyers to finance no more than half the cost of the apartment.
Someone buying an $800,000 apartment, she said, would be expected to have about $1.2 million in liquid assets – cash, stocks and bonds – and an income four to five times the annual maintenance and mortgage payments, or roughly $275,000. Bonuses, which can vary dramatically, are always counted as part of income.
On Park and Fifth Avenues what co-op boards like to see is generally a liquid net worth – not including real estate holdings or art – of four times the value of the apartmment, said C. B. Whyte, an agent with Alfred B. Ashforth. And buyers would need to have a seven-figure income on top of that, he said.
A young investment banker and his wife trying to buy a $1.1 million apartment recently showed a combined income in 1986 of $191,000, with his income with bonus in 1987 projected to be between $250,000 and $325,000. If everything goes as expected, the couple can well afford the purchase and the expenses of $75,000 a year they would be taking on for years to come. And if not? ”People tend to extrapolate, to annualize, and at the same time to escalate their life style,” said Mr. Zorn, 46. ”It is very seductive and a huge conflict. They want to live up to what they see are their capabilities and not think about savings.”
Henry Miller recently left his managing directorship at Shearson Lehman Brothers after nine years to join Eichner Properties. ”There is the desire to possess quality things,” he said. ”the desire to show off; the difference between men and boys being the size of their toys. There is a lot more spending on apartments than elsewhere and a tendency to hire name decorators and then spend an imprudently high percentage of net worth with them.”
BOB Immacolato runs Southfork Realty’s Sagaponack, L.I., office just east of Bridgehampton on the Montauk Highway.
”The whole environment changes in the summer,” he said. ”With all the BMW’s and Jaguars and other big- ticket cars, it’s like an auto show just sitting here on the highway watching them go by.” Waterfront houses, he said, rent for $40,000 to $60,000 a season and sell for upwards of $800,000.
Larry Ackerson, an agent in the office for the past 15 years, said the typical customers ”usually have $2 million to $3 million put away, and they buy in the $400,000 to $800,000 range. But sometimes they will buy on the strength of their optimism about their future situation and their credit rating. I see more of that than I’m comfortable with.”
Mr. Zorn and others interviewed think the young big spenders ought to come to terms with reality. ”None of them has ever lived through a bear cycle,” he said. ”They have never been through the tough times. They don’t want to postpone gratification and they want the good life at a young age. And they have the overwhelming arrogance to think it is not going to happen to them.
”But within a year or so it will end,” he said, ”as sure as I’m getting older. And these young guys are not going to be compensated in the same way in such large numbers over such a long period of time.”
Not surprisingly, the people interviewed all insisted that they would not be so foolhardy as to spend on the basis of anticipated earnings that may never come.
”Anybody intelligent enough to get a job as a banker at a major firm certainly is intelligent enough to realize that this party is not going to last,” said the 26-year-old research analyst. ”Certainly my friends and I recognize that we’re walking on the skin of a soap bubble.”
The 38-year-old investment banker said he took the precaution of paying cash for his apartment and summer home in anticipation of harder times ahead. He feels sure that the boom of the past five years, which has allowed him to start pondering 12-room co-ops on Fifth Avenue, cannot last.
”What’s going on is a one-time correction in the capital market, the sort of thing that can happen once in a century,” he said. ”It has maybe another six to 18 months to run, maybe the market will reach 3,000, but it’s passing.”
”And when it stops, all the music will stop,” he said. ”The market will go down, the mergers and acquisitions business will stop, salaries and bonuses will go down, people won’t be able to leave their jobs or they’ll be fired, the value of their stocks in the brokerage houses they own will go down, the co-op market will go down and it all will come unglued at once.”
In the meantime, the co-ops are selling and so are the country homes. The trick for this jackpot generation will be to keep perspective, not to become too enamored of the trappings of success, and not to forget that the bounty may not last.
The temptations, however, are great. The wealth in this city is astounding, and as one well-off New Yorker put it, ”you’re always meeting someone who has 50 times more than you.”
Or at least someone who lives as if he does.
The High Cost of High Living
Private School: $10,000 a year for each child
Driver: $26,000-$31,200 a year
Nanny: $20,800 a year
Housekeeper: $7,800-$18,200 a year
Designer Clothes: $1,000+ per outfit
Christmas in Antigua, Easter in Aspen: $10,000 a week for a family of four, including first-class airfare and accommodation only.
House in the Hamptons: Near the ocean: $40,000-$60,000 to rent, $400,000+ to buy. Oceanfront: $60,000+ to rent, $800,000+ to buy
Art: No limit
Catered Dinner Parties: $80-$125 per person
Brooke Kroeger is a freelance writer based in New York.
© 1987 The New York Times Company