Your TARP Money Put to Good Use
About the author: Jeff Rose is an Illinois Certified Financial Planner™ and co-founder of Alliance Investment Planning Group. He is a veteran of Operation Iraqi Freedom, having served in the National Guard.
Warning: For those of you that have been laid off recently, received a pay cut due to the recent economic crisis or frustrated with the government’s misuse of TARP money, this article might be hard for you to read. First, let me give a bit of a background.
Prior to becoming an independent financial planner, I worked for a regional brokerage that was bought out by Wachovia Securities back in 2007. Upon the announcement of the buyout is when I first learned about the concept of the “retention package.” Basically, when a brokerage firm gets bought out, it is industry standard for the purchasing firm to pay the newly acquired brokers to retain them and prevent them from jumping ship to the competition. Most people who survive a buyout or merger are usually thankful that they have a job, and definitely don’t expect to get an upfront check to stick around. So the idea that somebody makes a payday for just staying put sounds a bit absurd, even more so considering the state of the economy.
What the buyout means to you
Okay, let’s fast-forward to modern day. As I’m sure you’ve heard by now, the largest and well known brokerage firm, Merrill Lynch, was bought out by banking giant Bank of America. When I first heard this announcement, the first thing I thought of was, “How in the heck are they going to pay retention packages to the brokers?” The housing market has been a mess and write downs are still a reality. From a PR standpoint, I just couldn’t see them justifying paying huge amounts “just to keep” brokers that are already in the top 1% of all wage earners. But then again, this is corporate America. Here’s what was offered, according to planadviser.com:
Advisers who produce $1.75 million in fees and commissions will receive 100% of their last year’s book of business (as of September 15): 75% of their bonus in a seven-year forgivable loan, and another 25% in deferred cash over three years.
Advisers who produce $1 million to $1.749 million in fees and commissions will receive a seven-year forgivable loan equal to 75% of their last year’s book of business, and can receive up to a 25% growth reward, payable over four years.
Advisers who produce $750,000 to $999,999 will receive a 50% seven-year forgivable loan and can receive up to a 25% growth reward.
Advisers who produce $500,000 to $749,000 will receive a 25% seven-year forgivable loan and can receive up to a 25% growth reward.
Advisers who produce less than $500,000 will receive get a 20% deferred cash payment.
For those that are outsiders to the industry, let me explain the first bullet point. An adviser that produces $1.75 million in fees and commissions generally will take home about 50% plus. The other half goes to the firm. So figure a broker who is at that level will make about $875,000 (minus taxes of course), plus deferred comp and other little perks that aren’t mentioned. That same broker is now getting paid $1.31 million up front just to stay put with another $437,000 coming over a three year period. Notice, too, the number is based off their trailing production as of September 15th, 2008, just prior to the market collapse in October. Isn’t that convenient? Keep in mind that the broker is still getting paid the fees and commissions that they generate. Remember, they didn’t lose their job. They just got bought out.
Your TARP money to work
Just the other day, Bank of America just received another $20 billion of TARP money to help with their acquisition of Merrill. Based on rough numbers, it’s estimated that $3.6 billion of this will be paid for the top brokers to stay in their seats. How’s that for our tax dollars at work? The $20 billion is in addition to the $15 billion that Bank of America received last October and the $10 billion that Merrill received on January 1st. There’s more to it, but I’ll leave it at that for now. In a nutshell, our tax dollars are going towards paying brokers to not seek employment from a competitor. In case that last sentence did not register, please reread it, think it over, and let it digest. How did that taste?
How does that make you feel?
With U.S. unemployment flirting with 8%, how does it make you feel knowing that a broker who already makes almost a million dollars a year is going to get paid over a million just to stay with his company? There are many words that come to my mind, but I’ll let you fill in the blank for me. Please share your thoughts.
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Article comments
Discover Card also rips off its’ investors and even the taxpayers. They got themselves labeled a bank in 2008 to get TARP money. Instead of cutting expenses and acting responsibly, they decided to start sending 53 of their employees on trips to Key West twice a year, Las Vegas, Aspen, Miami, New York, Hawaii, etc. every year since. They are called the Local Markets group, and get paid to travel at least once a month to pretend they are putting up Discover stickers! The management knows this is happening, and won’t stop it. They are still traveling, partying it up, and doing nothing. Most take a friend or family along, most of them do nothing at all but travel and stay at home getting paid in between trips to lay around. Unreal in this economy! It is criminal! This is not as big as most of the scams, but these people get paid very well for doing nothing but stealing from their company. It is unreal that the taxpayer foots the bill for this nonsense.
….what i’m reading just crushes my heart into the dirt……having major financial problems at this point in my life….to see this bunch of humans crap money away in this way…is just irreprehensible…..and for the ones who give them the power to do it…they are in the same boat….where is my tarp bailout money……it is sickening…..I face possible total financial ruin…..sure I made some bad decisions……still I will be left holding the financial bag for their bad decisions too.
El Cheapo – this has probably do with the amount of money they need in reserve to account for future (maybe also current) paper losses in Merrill’s derivative portfolio.
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.
What I don’t understand is why BofA needs 20B in TARP money when they apparently have over 200B in cash on hand. Is it just me or am I reading Yahoo Finance all wrong? Plus is the TARP money being used to purchase preferred stock aka Tier 1 Capital? If so, does this not dilute the present and future value of common equity shareholders?
We are rapidly approaching a nationalization of major banks in America. Its quite a scary thought actually.
I agree with Adam-NPF. These are two different issues.
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.
I can’t say I’m pleased, but I have to admit that I don’t feel like there is anything I can do about it. I also know that there is a lot more waste that has already happened and there is more to come. I don’t want to sound pessimistic, because I believe good things will come from this as well. But I am also a realist. The facts should be known by the American public.
I believe this is two separate issues.
1) How the TARP funds are used (and who they’re given too)
2) How businesses are choosing to operate in this economic environment.
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.
You know, the plan for the TARP funds sounds a lot like what got us into a financial crisis in the first place. Irresponsibility and lack of foresight. With all the news back in October of banks closing, it sounds like hard times, but in reality, executives and brokers are still making out like bandits. Whilst the rest of the country suffers real loses. Unfortunately government officials can relate to bank executives far better than the average person and fail to see how that money could have been better spent. A very sad time indeed.
That is really terrible. I recently graduated college and went on to Army Officer School for 6 months. I came back at Thanksgiving and haven’t even found a part-time job (I was hoping to work both full-time and a side job to help my fiance with tuition).
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!
Thanks for pointing out the magnitude of the stupidity, unfortunately nothing will change. We will be outraged and call our Congress and they will balk at first, then make some changes that are really just adding pork and then they will spend, spend, spend on more stupidity.
Outrage doesn’t begin to explain my feelings on this matter. I work for one of the big banks and I’m seeing this pattern in other branches if the business. We’re so scared producers will jump ship we break our own rules to keep them happy.
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.
There are no words for the outrage. We might get a $500 tax credit, but these guys are getting billions? What if, instead of giving the TARP money to banks, it was given to individuals? What if every household got a payment of $50,000 to $100,000? That would help everyone more in the long run, since such sums of money would actually prevent foreclosures and spur consumer spending — accomplishing the stated goals of the TARP funds. Besides, if we could pay off our debt, then it would be possible for us to get loans again so we can restart the cycle. Isn’t that another thing our leaders wanted? For banks to begin lending again? With the more than $8 trillion that has been spent on bailout efforts (most aimed at the top of the economic food chain) since the end of 2007, we could easily have just given the money to the taxpayers. We’ll have to pay it back anyway — at least they could let us decide how it’s spent.