Nine months ago, Bear Stearns (BSC) traded for $150 a share. Six months ago, $125. Three months ago, $90. Friday, $30. This morning, despite a Fed- and JP Morgan bailout, presumably somewhere in the neighbourhood of $2.
For Bear’s 14,000+ employees who own more than 30% of the stock, as well as for the outside shareholders who own the rest, this is an unmitigated disaster. Unlike Friday’s Fed-sponsored $30-a-share bailout, however, it’s also a fair outcome.
Wittingly or unwittingly, Bear’s shareholders backed a management team that made a catastrophic error: allowing the company to get in a position where liquidity concerns could cause a run on the bank that brought the firm down.
Bear’s chairman Jimmy Cayne and CEO Alan Schwartz will likely go to their graves believing that Bear was the victim here–a rock-solid firm destroyed by an unforseeable credit crunch, rumours, short-sellers, and wussy, fickle trading partners. Jimmy and Alan have to believe this, because the alternative–acknowledging that a few months of high-risk gambling destroyed nearly a century’s worth of equity and franchise value–would be too much to take. But you don’t.
Last fall, when the credit crunch hit, other huge financial organisations like Citi, Merrill Lynch, and Morgan Stanley addressed their own disastrous gambling losses by rushing hat in hand to the Middle East, Asia, and elsewhere. Specifically, the firms raised billions in emergency capital to fortify their ravaged balance sheets. Although their shareholders screamed and gnashed their teeth at horrific dilution brought about by “heads we win, tails you lose” trading cultures, the firms are still alive to tell the tale. The same can’t be said for Bear.
There’s a reason Wall Street firms have minted so much money in the past 15 years: When you can bet $30 of borrowed money for every $1 of actual money, it’s easy living when things are going well. Of course, in the markets, things don’t always go well, and in certain environments, this level of risk is unacceptable. Or should have been–to a handful of senior executives entrusted with, above all, making sure no Bear Stearns observer ever mentioned the word “liquidity.”