Bear Stearns, one of the top five investment banks in the US, ends its 85-year old existence as an independent bank. JP Morgan announced on Sunday that it is acquiring the firm for $2 per share or a total value of $235 mn. This does not reflect the full cost to JP Morgan. Bear Stearns faces several lawsuits relating to the collapse of its hedge funds, so Morgan has to set aside $ 6bn towards litigation costs. Morgan acquires the $1 bn headquarters of Bear.
What a fall, my countrymen! Bear's share was valued at $169 last year and $30 last Friday. Bear's top management and hundreds of employees who have been rewarded heavily through stock options- think of what happens to their investment!
Jimmy Cayne, the chairman, himself was said to be poorer by more than half a billion dollars in a week's time. His holdings were worth $ 1 bn at one time. Now, it's said he gets all of $12 mn. People will say he asked for it- he must bear responsibility for pushing Bear into high-risk mortgage securities. That's not all. FT reports that JP Morgan is likely to sell off many of the pieces of Bear, including the investment bank, and lay of many of Bear's 14,000 employees.
Bear Stearns was different on Wall Street. It did not rise to the top meteorically. It clawed its way gradually without fanfare, without headline-grabbbing acquisitions, for instance. Its management culture was distinctive. It was an aggressive risk-taker and prided itself on its ability to manage those risks. Insiders used to talk of 'sweat sessions' between top management and leading traders where management would grill traders on their positions- the grilling was so intensive that those who concealed anything would start sweating.
Until about a decade ago, Bear shunned MBAs and management consultants. It hired ordinary guys with spunk and trained them to deliver. Base salary for top management was among the lowest on Wall Street; the firm believed in heavily compensating those who delivered. A big chunk of the firm's shares were held by employees awarded stock options over the years- that's why Bear's collapse will hurt its employees even more. Bear was also less diversified than other Wall Street firms and less international in its operations. But it kept shareholders happy year after year until it was undone by the disaster that hit its hedge funds recently.
Did Bear deserve such a fate? Of course, it was highly leveraged. Its capital of %11 bn was used to support a balance sheet of nearly $495 bn. But that's not new. Lenders have been happy to make funds available to Bear. It's just that, in today's conditions, confidence is scarce. That makes all the difference to a highly leverage institution.
Rumours have been rife about Bear's troubles, so every lender wants to pull out. The only way Bear can meet their demands is to sell assets. Asset prices tumble, the liquid assets disappear and then only illiquid assets are left. A liquidity problem quickly becomes a problem of solvency. Those who watched the collapse of LTCM will have a sense of deja vu.