Bear Stearns' collapse- LTCM all over again !
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.
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.
Labels: investment banking
posted by T T Ram Mohan at 10:18 AM
2 Comments:
You have very interesting Blog. Do you have any other information about Citco and GlobeOp?
Which one is superior in th elevel of service being provided?
I have also found interesting sites that you may be interested to checkout:
In Hedge Funds
My Hedge Fund
Hedge Fund Net
Regards,
I just happened to run into your blog, after doing some reading on LTCM. I read the book, "When Genius Failed: LTCM", and yes, I do agree with you that Bear reckons the same story as LTCM. However, LTCM was unregulated (being a hedge fund), while one would expect Bear to have certain standards regardings its ratio of leverage and the risks it was taking. What happened to the risk management guys? What were they doing?
Moreover, when rumors about Bear's liquidity issues were spread, Goldman's credit derivatives group sent its hedge fund clients an email ammouncing that it was done with Bear- they would no longer step in for them on Bear derivatives deals. Remember back in LTCM, Goldman joined AIG and Buffett in an effort to "rape" LTCM for merely 250 million (and gave them only a couple hours to think about the deal)?
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