Here is how it works:
1) A bank needs to have certain amount of capital in reserve before it can lend money. E.g. for every $1000 they take in deposits they can lend $900, but they have to put $10 in reserve. BoA and Merrill have certain amount of outstanding loans. The capital may be in cash or in commercial paper.

2) Some of this reserve capital contains mortgage-backed securities. Because of mark-to-market rule – introduced in 2007 by SEC with respect to mortgage-backed securities – the banks have to re-value these securities based on current market value. If the value of these securities on the open market drops, the bank has to add more money to reserve. Of course, this caused banks to want to sell these securities driving their value even lower, so they are selling now as if over 50% of mortgages fail and there is no recovery (i.e. foreclosed houses sell for $0) even if this isn’t true in all cases… but this is beside the point. Bottom line is – the paper value loss in the value of mortgage-backed securities is way above the actual losses in mortgage defaults.

This is a little like as if you bought your home with 20% down but one of the conditions is that you need to re-appraise your home every quarter and if the value of home drops, send bank a check for the extra amount so that the value of your equity never drops below 20%. This is what banks need to do – add money to reserve every quarter to account for these losses.

Incidentally, a lot of people complained how banks reduced credit limits on their credit cards. This is one of the reasons – some of these banks simply cannot afford to lend money up to this limit as their reserve wouldn’t allow it.

c) So now, even though BoA has this cash, it cannot use either all of it or a large portion of it for loans since it needs to keep continually larger parts of it in reserve.

This is how so many banks went out of business. It wasn’t that they didn’t have cash. They just didn’t have enough to replace the paper losses in value of these assets.

We are rapidly approaching a nationalization of major banks in America. Its quite a scary thought actually.

A few things to keep in mind:

a) How many of these really top brokers Merrill has? From what I read, Bank of America intends to keep only top brokers; it intends to lay off the remaining ones. Before we discuss how much money gets used for it, maybe we should figure out the number of these brokers.

b) BoA wanted to back out of this deal once it had a chance to look at Merrill’s assets in more detail, but the government pressured it to follow through. Now BoA is having problems because the government pressured it into taking this deal. If Bank of America that until this deal was one of the better banks would fail, what effect this would have on the credit crisis? Would the cost to all of us be even higher?

c) it’s not only brokers who worked for Merrill. A friend of mine is a computer programmer. Because of this deal he still has a job, although maybe not for long. But without this deal he’d have been out of work several months ago. No he doesn’t get any retention bonuses. There are some people at Merrill who may get to keep the job for at least a period of time because of this deal.

Combining them evokes an emotional reaction as seen by the above comments. But let’s think this through in a logical manner:
-I am a business trying not to fail in this economy
-In order to prevent failure, I need as much revenue for as little expenses as possible
-My revenue comes from my sales team
-Salesmen who sell more are more efficient from a revenue-to-expenses perspective.
-I desperately need to retain my best salesmen

BoA is entirely dependent on their big time rainmakers. Sure, they could scrap their entire sales team (adding to unemployment) and change their entire business model. But could they compete in this area? Do they have the expertise?

Now when Uncle Sam comes up and asks if they need money to get through these tough times, they can honestly say that they need money which will go almost entirely to employee retention.

So the real question is, why do a few select brokers make bazillions of dollars? The answer is because they generate even more. They add significant value back to the company (or at least BoA believes so) and so are worth keeping at any costs. If they lose them, BoA becomes a former entity.

I used to work for a grocery store before college. I’m going back there, if they’ll hire me… Back at square one literally. Forget becoming a teacher, I think I might figure out how to become a broker! They’re obviously more valued…

Thank you for sharing that. Anger gives me energy to fill out even more applications!

The funny thing is behind closed doors the producers are way too scared to leave themselves. They don’t want to risk moving on and not having any business. BofA needs to realize they won’t leave because business is bad everywhere. During economic growth that retention plan might make sense. But this is an outrage.