The phrase "cash sweep" may sound like a cleaning crew gathering loose change. But on Wall Street, the top brokerage firms are increasingly turning cash sweeps into gold.
The blue-chip securities firms are reaping bigger profits from a few simple changes to how investors' idle cash balances are treated. And most investors either don't notice or don't care that Wall Street's gains are coming at their expense as brokers turn around and reinvest the money for their own benefit at a higher rate.
Merrill Lynch & Co., which pioneered such tactics starting in 2000, is expected to report next week that its profits derived mainly from reinvesting customers' cash will top $2 billion for 2006, up from $1.3 billion two years ago.
Last year Morgan Stanley ramped up the same strategy of "sweeping" client cash to insured bank deposits, which pay rates as low as 1.25% on the smallest accounts. And the Smith Barney unit of Citigroup Inc. in September also began paying rates as low as 1.51% for cash in smaller accounts.
Take Wachovia Corp. Its brokerage pays just 1% on bank-sweep cash for accounts with under $100,000 in assets and 1.3% for accounts under $250,000, while accounts with over $1 million get 4%.
Joe Nadreau, director of client strategy, acknowledges the lower rates are "beneficial" to Wachovia, but notes they are just one element of its fees and costs in "the whole competitive fee landscape" in which larger accounts are inherently more profitable.
One person familiar with Merrill's decision to move uninvested funds to bank deposits starting in 2000 said it was inspired partly by a strategy pursued even earlier by discount broker Charles Schwab Corp.
Schwab had used its own interest-bearing account, effectively a Schwab IOU, as an alternative to money-market funds for client cash, earning a profit by reinvesting the funds at higher rates. Currently, Schwab and other online brokers earn more in interest income from cash balances and margin loans than from commissions.
Amid the regulatory prodding, some firms send clients brochures about their sweep programs that include some cautions. But readers have to look closely to discern that they may suffer financially.
The Merrill Lynch disclosure, for example, carries the bland headline, "Timely Reminder Concerning Yields on Deposits with the Merrill Lynch Banks and Certain Investment Alternatives." It says rates are "tiered" without saying plainly that small accounts get less. But it says the deposits are "financially beneficial" to Merrill Lynch, and a table indicates that accounts with less than $250,000 will receive just 1.51% and rates of up to 4.4% are available in money funds if clients speak with their broker.
A Merrill spokesman said the tiers are part of "relationship pricing, which rewards those clients with larger asset bases for consolidating all of their business with the firm. The process is transparent and fully disclosed in writing to clients."
NY Times Dealbook:Mack’s $40 Million Bonus Sets Record, For Now
Morgan Stanley gave its chief executive, John J. Mack, $40 million in stock and options for 2006, the largest bonus ever awarded to a Wall Street chief. But the record may be short-lived as press reports and analysts are predicting even bigger rewards for the C.E.O.s of rival investment banks.
The Wall Street Journal, citing unidentified sources, writes that Goldman Sachs’s chief executive, Lloyd Blankfein, is in line for compensation exceeding $50 million, and analysts told the newspaper that that some other chief executives, such as James Cayne of Bear Stearns and E. Stanley O’Neal of Merrill Lynch, could get $40 million to $50 million, or higher.
Mr. Mack received his entire bonus in stock and options. He was granted shares valued at $36.2 million as of Dec. 12, and about $4 million in options to buy Morgan Stanley shares. The firm also granted more than $57 million in bonuses for seven other top executives.
So the rubes trying to save for retirement get taken advantage of for the benefit of the large corporations and by extension their execs. That's the ownership society, fewer and fewer people own more and more snatched from the pockets of everyone else. The thing is is there's plenty of money to be made without fleecing folks. As folks wake up to the graft practiced by the rich, economic populism is only going to grow in appeal. The greed of the upper class is going to be repaid with interest and they will have no one to blame but themselves.