As an insider to the financial services industry, the nitty gritty details of bank operations always gets my attention.  I’m also very wary of the people we call “producers” at the bank; in the strictest of terms they are our commissioned sales folks.  In good times and bad, Sr. management values their contributions because they directly impact the bottom line.  The rest of us are technically “expenses.”  When times are tough, hiring by many firms is limited to just the sales force.  Sales people jump around quite a bit from company to company, and so retention remains an important issue in the world of sales.

In my world, it is not uncommon for management to grant the wishes of high producers, only to give the cold shoulder to those that are not so profitable.  Perhaps this is fine, but that debate is for another time.  What I was not aware of is in the brokerage world, retention is very highly valued.  This is because of repeat business.  Traders keep their clients coming back for more, taking fees on every buy and sell opportunity.  Other types of salesmen may only be able to sell a product once, and then they must move on to new clients.  I had my eyes opened to me recently by some analysis by a former broker.

This fellow, Jeff Rose, used to work for AG Edwards before it was bought by Wachovia.  He was surprised to learn of an industry “custom” of the buying firm to pay bonuses for retention.  This makes sense actually because brokerage services are like a commodity (as in you can do it anywhere with any broker).  If a broker leaves, they take that repeat business with them.  Lost business means lost revenue, making the purchase of the brokerage pointless.

Jeff got wind of the payouts being offered to Merrill Lynch brokers as a part of the buyout from Bank of America.  The details of which, he explains here.  Basically, people already making hundreds of thousands a year, will be getting bonuses.

Now, stop there for a second.  As an “expense” to banks I have the right to be outraged by this. While thousands are getting laid off, these guys are bringing in much more than they were previously making, simply because their company failed and they were bought.  All the while there isn’t enough money in other organizations to travel to the home office on a bus.  On top of that outrage, the economy is in the tank.  Even brokers have suffered business losses, and the entire industry has performed poorly in the last 18 months.  As a bank employee, I think it isn’t fair to give big bonuses to ANYONE, despite their importance to the institution.  Now is a time to test loyalty.  If those people aren’t loyal without bonuses, let them leave.  During an economic boom, I might have no problem with the bonuses.

But I’m not mad about any of it (notice I said I had a right to be).  None of what the Bank of America is doing really bothers me now that I’ve simmered on the thoughts for a few hours.

What bothers me is that we taxpayers are potentially paying these retention bonuses.  Bank of America said they needed new TARP funds to deal with the Merrill Lynch purchase.  Jeff estimates these bonuses could represent as much as 15% of the money Bank of America needs, or about $3 billion.  Now I’m not going to play number games, but even if the estimated bonuses for $500 million, or $100 million, that is too much.  I’m not even including the potentially more outrageous payouts going to executives with your money.  This money is coming from the government, and it’s being handed some of the highest paid members of society.  The political implications of this are far reaching.  Us poor folks, or “the help” as we’re called are the most in need to the government bailout, and it’s helping Merrill brokers buy their 3rd and 4th homes.

But I’m not mad at Bank of America, and I’d say “congrats” to the lucky guys who profit from this bailout.

They are doing everything within the realm of legality and the best interest of their firms and personal livelihoods.  We can only expect that from the private sector. Nope, I’m pissed at TARP, or more directly, Congress, for passing a bill that allows such action.  If these companies are to receive government money, all bonuses should be frozen until the funds are paid back.  I’m sorry if the bank needs to pay it’s producers to stay, they shouldn’t have gotten themselves in a situation to need federal money.  They deserve to lose the business that would come with not paying bonuses.  The companies that don’t need federal money deserve to gain the business of these brokers.  But it’s up to our federal regulators to require this in the legislation.  That’s where I’m ticked off.  That is where I’ll lose sleep.  Our elected officials have NO CLUE how to properly regulate, or stimulate, the private sector.

By the way, Jeff has a fantastic blog over at Good Financial Cents.  Please check him out there.

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics.

categories: banking, business, economics, government