Forget Enron. The destruction of shareholder value on an epic scale is how Wall Street analysts are explaining what has happened to Bear Stearns workers this week, as they saw their company sold to JPMorgan Chase for $2 a share.
Last year, stock at Bear Stearns, once the fifth-largest investment bank in the United States, sold for $170 a share. And about one-third of the bank’s outstanding stock is owned by its own employees, the same workers who may see pink slips in the near future.
James Dimon, the chairman and chief executive of JPMorgan Chase, addressed Bear Stearns executives for 45 minutes on Wednesday evening, explaining that while “No one on Wall Street could have anticipated this,” he anticipates that many of Bear’s 14,153 employees will lose their jobs as a result of the deal. He noted that JPMorgan executives will try to keep the best performers as they move to integrate the two firms.
Hungry for Bear Brokers
Merrill Lynch, Morgan Stanley, UBS, and Smith Barney have already offered some Bear Stearns brokers attractive packages with signing bonuses.
In response, JPMorgan Chase executives are reportedly offering retention packages to top Bear Stearns employees, which include bonuses, loans, and other financial assistance.
Beyond the brokers, however, are the thousands of other employees in administration, operations, marketing, and other departments.
JPMorgan Chase is expected to keep Bear’s prime brokerage, global clearing platform, equities, and energy trading businesses. David Trone, a managing director at investment bank Fox-Pitt Kelton, says workers involved with trading and securitization of prime mortgages (loans to high-quality borrowers) will be the most protected.
However, there may be overlap between the two companies’ fixed income and investment banking divisions. Trone predicts that less than one-third of workers in the fixed-income trading division will keep their jobs, and about half of Bear’s investment banking and equities workers are likely to get cut.
Legal Woes, Severance Plans
While the deal will cost about $270 million, JPMorgan chief financial officer Michael Cavanaugh explained on a conference call Sunday night to investors that deal-related costs would total $6 billion to handle potential litigation and severance costs.
And “potential” has never been a more accurate description of what is about to transpire on Wall Street.
The firm is already facing several employee-led class-action lawsuits that claim that because executives waited too long to reveal the firm’s financial health, Bear Stearns stock was artificially inflated, leading to this collapse. A Bear Stearns spokesman was not available for immediate comment.
Savings Collapse
Most employees have been paid in stock share bonuses in recent months. With about 35% of New York City’s wages derived from Wall Street jobs, the New York City economy is bracing for the worst.
As comparisons are being made to Enron, many employees have lost their main nest eggs.
The Economist reports that Bear Stearns encouraged many workers to buy shares after it went public in 1985, and today, employees own about one-third of the bank’s outstanding stock. Employees were prevented from selling shares, according to the Economist, because an earnings announcement was coming.
“Never in my wildest dreams did I believe we would be sold for $2,” one shell-shocked trader told the New York Times.
While these workers await their fate, perhaps they can brush up on works by Shakespeare. JPMorgan CEO Dimon, who essentially holds these workers’ fate in his hands, once said Shakespeare is even better than Freud in showing you the characters you are dealing with.
“In tough times like these, you see more of the good and more of the bad in people,” he told the New York Times in November 2007.
“You can go for a long time and be fooled by people’s behavior, but Shakespeare gives you insights that help you understand the people you are dealing with. I don’t relate what’s happening so much to the market as to how people behave. You want to know that in the foxhole with you is a person of good character, that they have a true north.”