US subprime set to burst London bankers bonus bubble

London, Aug 30 | Updated: Aug 31 2007, 05:27am hrs
Only six weeks ago London's financial hub seemed headed for another round of hefty bonus payouts from a bumper first half of transactions. But a global financial downturn has dampened the mood. Bankers and traders who splurge on fast cars, vacation homes and luxury yachts with the extra cash each year may be forced to scale back their spending plans as the US subprime turmoil and credit squeeze have brought dealflow to a grinding halt.

About 4,200 bankers in the City of London pocketed bonuses of more than 1 million pounds ($2 million) each in the latest bonus season, according to an estimate from Britain's Centre for Economics and Business Research (CEBR). But payouts could tumble by as much as a quarter this time around, said Jonathan Said, a senior economist at the centre.

The forecast is a U-turn from the centre's earlier prediction that this year's City bonuses would top last year's record high pool of around 8.8 billion pounds ($17.7 billion), which itself was an increase of 18.3% on 2005. Since then, a sharp rise in defaults in the US subprime mortgage market -- which caters to borrowers with poor credit histories -- set off global market volatility and deeply dented revenues of some of the world's biggest banks. "Banks are having significant increases in their costs. They can't access liquidity as cheaply as before," Said said. "The first costs that you take off are bonuses." He said he expected a decline of 10 to 15% in payouts compared to last year but it could stretch to 25%.

Investment banks and brokerages typically pay half their earnings to staff. The bonus season runs from December to March. Top dealmakers earn extra pay that can run to several multiples of annual salary, while traders can earn a percentage of profit they make for the bank.