12/09/2010 06:48 pm ET Updated May 25, 2011

Wall Street Buoyed by Prospect of Bush Tax Cut Extension, Bonuses

Nobody was watching President Obama on CNN during Happy Hour at the PJ Clarke's in the World Financial Center. Partially because the sets tuned to CNN were dwarfed by giant widescreen TVs broadcasting highlights from the Giants game, and partially because the sound of clinking glasses and boisterous laughing made it nearly impossible to hear what the President was saying. This, despite the fact that he was discussing possible tax increases that would directly affect many in this well-dressed, mostly male, Wall Street crowd.

The scene was dramatically different just two years ago. Then, all eyes were glued to the TVs, following every move of the financial markets. Bartender Andrew White remembered the September afternoon after Bank of America bought Merrill Lynch, and everyone was talking about the layoffs that would be created by the merger.

"It was the single busiest day of my career. Everyone was in, drowning their sorrows."

This was the same day that Lehman Brothers declared bankruptcy, precipitating a domino-effect of financial collapses across the Street, more layoffs and a subsequent 54% decline in the value of the stock market by March 2009. Merrill Lynch moved out of the World Financial Center complex, but Bank of America never moved in to fill the empty space. At that point, although business at PJ Clarke's held steady, the business was mostly dependent on going-away parties for laid-off workers.

As manager Ken Hansen put it: "we were getting business for all the wrong reasons. Parties were not being booked, we were running smaller crews, trying not to lay off people." In 2007, a record-breaking year for Wall Street profits, Christmas office parties at PJ Clarke's were free-for-alls with unlimited budgets, surf and turf buffets and generous pours of expensive Scotch. By 2008, Hansen recalled that party organizers would arrange for open bars but whisper to him: "Can you let me know when the bill hits a certain mark?" at which point they would shut the bar and make people pay for themselves.

Hansen watched business drop 30%, and nearby restaurants like Applebee's and Chevys close down. He responded by revamping his operating costs, downsizing standard portions, and offering a daily $10.85 lunch special. It helped somewhat.

"There were times when it was 10pm and there were three people in the bar and nobody in the dining room. It was weird. Even Monday night football wasn't keeping people in," Hansen recalled.

According to the New York Center for Economic Development, of the 2.7 million employed Manhattanites, over 350,000 of them work in the financial industry, earning an average of $212,000. Between August 2008 and December 2009, approximately 74,000 jobs were lost on Wall Street. This made a big impact on New York business, both big and small.

Yet, throw in one part government bail-out in the form of TARP funds, mix in two parts soaring stock market and business is back, both on Wall Street and at PJ Clarke's. Last year, Wall Street profits, due in large part to the bailout, were a record $61.4 billion. And this October was New York State's best month for new jobs in five years, though these jobs were created in business services such as accounting that are used by Wall Street firms, rather than directly on Wall Street.

Hansen saw business begin to improve at PJ Clarke's this past summer when investment banking giant Goldman Sachs moved across the street. The closing of the competing local restaurants has only helped their business.

Andrew White described the change from 2008 to now: "One bartender would have been a little bored, but now two bartenders are on and we're moving," he commented, as he juggled three separate groups of customers at the bar.

Yet what Washington gives, it can also take away. Debate is stirring over the possible expiration of the Bush tax cuts on December 31.

Congress was only able to pass the Bush tax cuts in 2001, which lowered the tax rates from its Clinton-era levels, with the provision that they would expire at the end of 2010. These cuts included a gradual increase in the estate tax exemption leading to a one-year full exemption, and a lowering of the capital gains tax from 20% to 15%.

At the heart of the current debate is the Democrats' goal to to return tax rates to the pre-2001 levels, with a maximum tax rate of 39% on individuals earning $200, 000 and couples earning $250,000.

According to Andy LaPerriere, Senior Managing Director of the ISI Group in Washington, "The Republicans are standing their ground and winning this politically. They are not going to concede on this point and they're not going to have to do. It's going to be up to Democrats to decide if there's going to be a deal."

In a conversation last Wednesday, he predicted: "At this point, it's all or nothing - either all the tax cuts will be extended for at least a year, or they will all expire."


At PJ Clarke's, customers seemed upbeat, perhaps buoyed with thoughts of year-end bonuses. New York State Comptroller Thomas DiNapoli estimated that Wall Street profits would hit $19 billion this year, the fourth highest in 30 years.

However pleased they are with their profits, customers are not giving President Obama or the government any credit. "You can hear more people openly griping about Obama," Hansen admitted.

Though these big bonuses could be at stake if the tax cuts expired, nobody sitting in front of tall glasses of draft beer at the long zinc bar seemed overly concerned. That could change if Congress enacts a millionaires' tax, whereas all income up to $1 million/year would be taxed at 35% and everything above at 39%. At these rates, a worker earning $1 million would pay $40 -50,000 more in taxes a year.

LaPerriere thinks that a millionaire's tax could be a possibility in the future. "A deal for that could be made where the tax cuts could be extended for a year or two, and then a new tax -- like a millionaire's tax -- could kick in," he said.

New York's senior Senator, Chuck Schumer, has introduced the idea of this tax as part of the compromise. Schumer, who has presented himself as both a champion for the middle class as well as for Wall Street while serving on both the Banking, Housing and Urban Affairs and Finance Committees, has received nearly $2.5 million in campaign contributions from the securities industries. Yet, he appears confident about possibly offending some of these supporters with this proposal.

"Lots of the wealthy people I speak to, Republicans, in my state say, 'You know what? I know the rates could go back up to what they were in the Clinton years for me, and I can afford it,'" Senator Schumer said in a recent interview.

An equity trader standing at the bar of PJ Clarke's seemed somewhat resigned to eventual tax increases. He explained: "The city's already raised our taxes, if the federal government raises it another 3%, it doesn't really make a difference."

When asked about the possibility of a millionaire's tax, Darren Fogel, a portfolio manager at Neuberger Berman, responded: "Worried? Not really. It's one of those things where you say, what can I do about it?"

"Obviously most guys here are Republican and pro-business. But there's not a lot of discussion or worry about taxes now," said Andrew White, the bartender.

That could be good news for Democrats politically as they maneuver their way to a tax compromise. At this point, the White House and Congress have reached a tentative arrangement where the tax cuts will be extended for two years in exchange for an extension of unemployment benefits, a cut in payroll taxes and a return of the estate tax, though at a lower rate. As for the effect on the Wall Street crowd if and when new taxes do arise? One look at the towncars lined up waiting for PJ Clarke's customers is a reminder that Manhattan is an island unto itself.