Sore Heads

Disaster yields disbelief—and disgruntlement.
Economist StaffMarch 25, 2008

Wall Street is often criticised for heaping gold on bankers in fat years, but failing to penalise them in lean ones. Witness the 10% rise in total pay at America’s investment banks last year, despite an awful second half. But the fate of Bear Stearns shows that, when things go really wrong, punishment can be severe.

Bear’s executives have lost billions. At $2 a share, the 5% stake held by Jimmy Cayne, the chairman and former chief executive, worth $1.2 billion at the shares’ peak last year, is now valued at $11m (less than half of what Mr Cayne recently paid—mortgage-free, naturally—for an apartment in the Plaza Hotel). There are reports of managers putting holiday homes on the market. BFdesigns, which tarts up such dwellings before they are sold, has charitably offered to cut its fees for any Bear employees.

Lowlier workers have been hit even harder. Bear encouraged them to buy shares after it went public in 1985. Their purchases have pushed employees’ combined stakes to one-third. Some have lost their main nest eggs, others the money to put children through college. Worse, half or more of the 14,000 staff are expected to lose their jobs. Counsellors are on hand. Comparisons are being made with Enron, where the employees lost $2 billion in pensions.

The shock is fast turning to anger: that bosses left it so late to seek capital; that employees were prevented from selling shares because an earnings announcement was coming; and, above all, that JPMorgan Chase has probably got a bargain.

Allied with big shareholders such as Joe Lewis, a Bahamas-based billionaire who spent $1 billion on Bear stock last year, some employees like to think they can muster a majority against the deal when the vote is held in six weeks. On March 18th Bear’s shares closed at $6.51, reflecting the chance of a higher offer.

That looks a forlorn hope. JPMorgan is backed by the Treasury, the president and the central bank. It is small solace to Bear’s bankers that they will serve as a salutary example to others.

Their fate is also likely to harden resistance on Wall Street to receiving bonuses in shares rather than hard cash. The dollar may be taking a battering, but at least it will be worth something this time next year.