Wall Street bonuses topped out at a whopping $24 billion in New York City for 2006, the state comptroller’s office reported in late December, a week after Goldman Sachs said that it would pay its employees $16.5 billion in compensation. But these stratospheric paychecks are only partly good news for Gotham.

Vastly higher pay doesn’t mean vast numbers of new jobs, for starters. While bonuses are up 23 percent since the boom year of 2000, jobs are actually down 10 percent. Six years ago, Wall Street employed 200,000 New Yorkers. Today, it employs fewer than 180,000, the same number that it employed in 1997.

True, since 9/11, employment in the securities industry has grown robustly—indeed, at triple the employment growth rate in other sectors of the city’s economy. But New York can’t rely on Wall Street to generate a broad base of good middle-class jobs. Each Wall Street position may “create” two additional city jobs and another one regionally, but the employment tends to be in not particularly well-paying restaurants and retail (all those traders and bankers going out to eat and buying stuff). And the high taxes that New York is accustomed to levying on its Wall Streeters deter new investment in other job-creating industries in the city and the state.

As Wall Street surges, moreover, New York City and State get more dependent on its revenues. The city’s personal income tax, driven by Wall Street, now accounts for more than 20 percent of the city’s tax collections, double what it did 20 years ago. As the comptroller reports, income-tax money from 2006 Wall Street bonuses alone will pour $1.6 billion into state coffers and $500 million into city coffers. And this figure doesn’t include the millions that Wall Streeters will no doubt generate for the city in sales taxes, property taxes, and real-estate transfer taxes.

Even as city and state finances become ever more dependent on Wall Street, Wall Street itself grows more dependent on revenue derived from riskier activities. Take that headline-grabbing $16.5 billion that Goldman will shell out in compensation. Goldman can pay six-, seven-, and eight-figure bonuses because it’s putting its own capital at risk, bringing in lots of extra money by making more big short-term and long-term bets with its money, rather than doing traditional investment banking.

Seven years ago, Goldman made about one-third of its net revenue from investment banking, in which it generally doesn’t risk its own capital, and about 40 percent in “trading and principal investments,” in which it often does. But in 2006, only 15 percent of Goldman’s revenues came from investment banking; nearly 70 percent came from trading and principal investments, where revenues grew more than 50 percent over the previous year (the rest of Goldman’s revenues came from smaller business lines). In fact, one measure of the firm’s risk-taking—“value at risk”—increased by more than 40 percent in one year.

These results mirror another trend. As competition makes it harder for investment houses to book huge annual gains in bread-and-butter business like arranging debt, firms must act with ever-greater creativity and take more sophisticated risks to keep raking in the dough. Wall Street firms hedge some of this risk through their bonus structure. In a bad year, Goldman could slash bonuses before having to lay off thousands. But that means city tax revenue would fall precipitously as well.

While Mayor Michael Bloomberg has been somewhat prudent with some of these “extra” tax revenues from Wall Street, using $2 billion last year, for instance, to start a “trust” fund to pay for the future health benefits of city retirees (instead of spending the money right away), the city still unwisely tends to rely on “extra” tax money to paper over future deficits. If that money dries up one year, the city will be in real trouble. (Putting away money in a health-care trust fund also discourages labor unions from agreeing to pay a share of health benefits, which already represent a $50 billion–plus future liability for Gotham.)

The words of one once-and-future mayoral candidate shouldn’t give New Yorkers much confidence that the next mayor will understand how perilously dependent New York is on Wall Street. At a December conference on the city’s taxes, Brooklyn congressman Anthony Weiner, told that 1 percent of city taxpayers pay a full third of income taxes, cracked: “They can afford to pay more.”


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