For a moment, it looked like banks were going to become a lot more parsimonious about paying staff. Last week's Q1 results suggest they're not.
Investment banking compensation ratios (the ratio of compensation and benefits to net revenues) held up admirably in the first quarter. At Goldman Sachs it was 50%, up from 48% in Q108. At JP Morgan it was 40%, down from 41% in Q108. And JPMorgan explicity stated that performance-related pay had risen.
As The Baseline Scenario highlighted last week, the driver of Q1 revenues at Goldman and JPMorgan was remarkably similar - fixed income trading.
Citigroup benefited from the same phenomenon: when it reported on Friday, it revealed that it had turned a $7.02bn trading loss in Q108 into $4.69bn fixed income trading revenue in Q109.
But how much of last quarter's fixed income revenues were really due to the expertise of traders?
Blackrock managing director Peter Fisher attributed much of Goldman's Q1 profits to AIG unwinds. With spreads high and base rates close to zero, making money in the past few months has been compared to shooting fish in a barrel.
In these circumstances, compensation ratios might be expected to fall. Banks could have reallocated profits towards shareholders.
This was a real possibility. A few weeks ago, Alan Johnson, a pay consultant on Wall Street, told us banks had asked him whether he thought comp ratios were going to fall. He said it was impossible to predict and Q1 results would provide some clarity. We've now got that clarity: they're not; given the choice banks will continue to funnel money in the direction of employees.