Brokers and TARP Money

Looks like others are starting to learn the story. Your individual stock broker — getting TARP money — is just plain wrong. And the size of these retention bonuses is extreme.

But believe it. It is happening right now. Merrill brokers are getting their TARP money right now.

What’s even more outlandish is the fact that industry executives (who created the very concept of paying these retention bonuses) refuse to call them bonuses. In the Investment News article (link is below), a spokesman for Morgan Stanley states these are “not bonuses.”

Let’s clear this up, since many folks outside the business don’t seem to understand how these retention bonuses work.

The structure of a retention bonus works like this: 100% (or more) of the stockbrokers trailing 12 months gross commission is handed to the broker. So a broker generating $750,000 in commissions the last 12 months could be handed a check for $750,000 (or perhaps $1,000,000) in TARP money. Your money.

In exchange for the TARP money (retention bonus), the broker signs an agreement to stay at the firm for a period of time (several years). This money is also structured as a “forgivable loan” or “forgivable note.” What this means is, if the length of the deal is 5 years, then 20% (one-fifth) of the loan is written off (forgiven). So every year, the stockbroker in this example would have “phantom income” for each of the five years of his deal. So the stockbroker would have to make allowances to cover his income taxes.

But the money is real. Very real.

Think this is a small group of stockbrokers? Think again. Brokers generating less than $500,000 are being shown the door at many large firms, or seeing their payouts chopped.

Stockbrokers are being handed money to sit at their desks. TARP money.

Your money. Completely wrong.

Here is the link to the article in Investment News.