Enjoy your bonus before payouts begin to dry up

Anyone leafing through UK newspapers before Christmas would have noticed the usual stories about must-have toys, travel chaos, and how the seasonal break is now stretching to three weeks off work.

Yet one familiar staple is missing. Almost nothing has been written about the eye-watering bonuses being handed out to workers in the City, as London's financial district is known.

There is a simple reason for that. Bonuses, by recent standards, are likely to be very modest this year. The days of the mega-bonus may be gone for a long time to come.

The credit crunch isn't a disaster for the global economy, but for one small section of it: people who work in the upper echelons of the money markets, creating, selling or trading exotic financial products.

Since they are the people who collect the big bonuses, it isn't hard to conclude that the outlook for next year is wintry. The 2007 bonus season may still be a good one for a few bankers.

Lehman Brothers Holdings Inc has said its bonus pool for staff rose 10 percent this year. The bank will pay about $5.7 billion in bonuses compared with $5.2 billion in 2006. Likewise, Goldman Sachs Group Inc staffers look set to enjoy yet another good year.

The New York-based investment bank had set aside $16.9 billion to pay salaries, benefits and bonuses in the first nine months of 2007, even more than its 2006 full-year record, according to the company's third-quarter earnings report.

Elsewhere the picture will be more mixed. The London-based Centre for Economic and Business Research says City bonuses may drop 16 per cent next year. The UK recruitment firm Armstrong International estimates a 2007 bonus decline of as much as 20 per cent in London compared with the 2006 payouts.

And some people may just feel too embarrassed to collect anything at all, given the kind of setbacks their banks have suffered. Marcel Ospel, the chairman of UBS AG, said this month that he didn't "expect or want" a bonus for 2007.

When you have just written off $10 billion for losses on subprime investments, it is probably understandable. Plenty of other senior bankers may be struck by similar pangs of guilt over picking up anything more than their base salary.

One year of reduced bonuses wouldn't matter very much. Nobody ever claimed that finance was steady work. There are good and bad years, and everyone accepts that. The issue is what happens when you look forward. Is this just a dip? Or is it a turning point?

Already, the market for luxury goods indicates that a turning point has been reached. The prices of London luxury homes have stalled, according to Knight Frank LLC. It expects only modest increases next year as bonus payments dwindle. Likewise, decent wine. According to the Liv-ex.com index, prices of the best wine, which have more than doubled in the past two years, are starting to fall.

The message? The big bonuses won't be back any time soon. There are three reasons for that.

One, innovation is about to dry up. The big money in finance has been made in devising new and exotic financial instruments.

Slicing and dicing different kinds of bonds, and repackaging them in novel ways gave banks huge profits in the past five years. The credit crunch has killed that market stone dead.