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Lessons from Bear Stearns

Posted by Larry Doyle on March 16, 2009 10:37 AM |

It was one year ago that the Federal Reserve and Treasury delivered Bear Stearns into the hands of JP Morgan for $2 a share. Bear Stearns stock had traded above $170 a share in 2006. With the passage of time, what are some of the lessons learned and what questions remain unanswered.

1. Although Bear Stearns employees and shareholders may not qualify a price of $2 a share (revised to $10 a few weeks later) as being saved, would the financial system have been better off letting Bear totally fail? Why? If Bear had failed, many people do not believe we would have had the breakdowns in our financial systems that occurred because of Lehman’s failure.

2. Did Dick Fuld, CEO of Lehman, assume that the Fed and Treasury would save Lehman much as they did Bear? Was he less aggressive in pursuing increased capital injections during the Summer 2008 as a result? Many people believe this to be the case.

3. Did AIG take the same approach as Lehman? Or were they so large that no matter what approach they took was their goose already cooked?

4. Will Bear’s fraudulent mortgage lending practices within their mortgage origination business, EMC Mortgage, based in Texas be pursued? JP Morgan now owns this business. A change in ownership should not preclude pursuing criminal behaviors.

5. Are people aware of the totally dysfunctional relationships amongst 3 of Bear’s senior level executives, Alan “Ace” Greenberg, Jimmy Cayne, and Warren Spector? The WSJ reports that Ace and Jimmy have not spoken since Bear’s demise. Spector is strongly suspected of providing the information that the Wall Street Journal used to trash Jimmy Cayne. Where was the Bear Stearns board in the midst of the demise? Who was looking out for the shareholders?

6. One of the initial cracks in the financial system occurred in the Spring 2007 when Bear Stearns Asset Management failed to support two of its funds managed by Ralph Cioffi and Matthew Tannin. These individuals are awaiting trial. What will their fate be? What will their defense be? Will they implicate Spector who oversaw BSAM?

7. I find it amazing that Bear executives, including Cayne, Greenberg, and Alan Schwartz continue to assign blame to the following groups and individuals: hedge funds that spread rumors of Bear’s demise, Tim Geithner for opening the Fed window only after Bear was sold to JP Morgan, Hank Paulson for indicating to Jamie Dimon at JP Morgan that he was the only legitimate buyer and he should lower his bid. Never once have I heard any Bear executive indicate that they were too leveraged, that they were more concerned with their own fate instead of their employees and shareholders, that they had few if any real friends on Wall Street. Never once have I heard any Bear executive indicate what could have and should have been done differently.

8. In reading some recent interviews with former Bear employees, I still see the blind faith in a firm that did not protect and defend its’ shareholders and employees. Bear’s executives consistently paid themselves egregious levels of compensation without regard for properly protecting the franchise.

9. Another critical lesson for employees is not to invest excessive sums in your employer. In the process of doing that you are actually growing your risk exponentially as you are risking both your salary and investment on the same company. Why do people make this mistake? They are chasing the same dollars that senior management is paying themselves. Additionally, although employees may feel they understand the risk embedded in the company, I would maintain that they are actually so close to the risk as to not have enough perspective. Bear Stearns’ employees and Lehman employees each owned in excess of 30% of the company. This degree of employee ownership is a huge mistake.  

While the question of the moral hazard created with Bear Stearns’ demise can and will be hotly debated for years to come, the real tragedy of Bear Stearns is the tremendous loss of value for shareholders, employees, and global finance at large. As Shakespeare wrote in Julius Caesar, “our fate lies not in our stars but in ourselves.” In a similar vein, the rise and fall of Bear Stearns was a function of egos and hubris that spun out of control.

That lesson is the real moral of the story.


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