A very high cost for big mistakes
Posted
Mar 16 2008, 10:37 PM
by
Charley Blaine
The proposed sale of Bear Stearns on Sunday to JPMorgan Chase for $2 a share, or $236 million, will keep litigation lawyers busy for years as enraged shareholders seek to recover anything from the disaster.
The losses from Bear Stearns' demise are shocking, so shocking that Asian and Australian stocks tumbled on the news. The dollar was fallling. Crude oil jumped over $111 a barrel, and European shares were expected to open lower as was the U.S. stock market.
From a peak price of $171.52 in January 2007, Bear Stearns managed to lose 98.8% of its peak market value of $20.2 billion in less than 15 months, all because the company bet everything that the housing market and the markets for securities backed by subprime mortgages wouldn't break. It did.
The collapse came so fast that many investors big and small were unable get out of the stock. Institutions had held 70% of the stock at the end of 2007. Indeed, while some commentators called the deal a bailout, Barry Ritholtz, on his Big Picture blog, called the move a liquidation.
The run on Bear Stearns forced the Federal Reserve to agree to an emergency financing for Bear Stearns on Friday. The Fed approved the deal with JPMorgan on Sunday, approving a $30 billion line of credit to support the takeover. it also cut its discount rate as well on Sunday to 3.25%. The Fed is expected to cut its key federal funds rate to 2.25%, perhaps to as low as 2%, on Tuesday.
It won't be clear for some time who absorbed the biggest losses from the collapse. Everyone was trying to get out of the stock on Friday when 186 million Bear Stearns shares changed hands -- 50% more than than the shares actually outstanding. The share price fell 47% to $30.
Some smart people are sitting on big losses. Joseph Lewis, the billionaire British investor, owned 9.4% of Bear Stearns, a stake he started to build last summer and may have lost as much as $900 million, more than a third of his net worth. Sources told The Daily Telegraph in London that he may have been forced to sell his stake on Friday. Dallas money management firm Barrow, Hanley, Mewhinney & Strauss was Bear Stearns' largest institutional shareholder with a 9.95% stake. It's mostly gone.
My guess is that Bear Stearns' 14,000 employees will be the biggest losers. The company's employee-stock-ownership plan owned 23% of the shares as of Feb. 14. The shares that day had a market value of $2.18 billion. It's almost gone now. Needless to say, Bear Stearns employees aren't happy. Check here for a sampling of their anger.
Bear Stearns' top brass are also huge losers. Chairman James Cayne, who was chief executive of the investment bank until late 2007, lost roughly $1 billion from that January peak. Current CEO Alan Schwartz saw his holdings shrink from roughly $240 million from January 2007 to less than $3 million.
But as painful as that is, it probably is as it should be. They and others were in charge of the company and failed to understand the poison eating away at the company.
They're not alone in losing millions. Wall Street bosses have seen the values of their holdings in their companies shrink dramatically from their peaks last year, thanks to the financial crisis that has engulfed the U.S. economy.
Richard Fuld, CEO of Lehman Bros., has seen his stake fall by a bit less than $600 million since February 2007. Lloyd Blankfein, CEO of Goldman Sachs, arguably Wall Street's most powerful investment bank, has watched his stake fall in value by more than $230 million. Morgan Stanley's John Mack has lost $130 million has his company's shares have fallen 47% since June 2007.
JPMorgan Chase CEO James Dimon has been hit as well. His stake's value has fallen by $130 million since peaking in May 2007.
And they may lose more until investors start to trust Wall Street again and the stock market finally stabilizes.
