Bear Stearns: Personal Fortunes Wiped Out Overnight

New York, NYAs the bewilderment and disgust over the Bear Stearns debacle washes through Wall Street, it is becoming clear that no one is going to let the firm go for the disparaging price of $2 a share. The current figure bandied about by JP Morgan Chase, the hopeful suitor, is now $10 per share—and that figure might go even higher if rival bidders step up to the plate in an effort to gain control of the beleaguered trader. To be sure, the higher the share price at the time of the sale, the better it will be for Bear Stearns employees who hold company stock in their 401(k) retirement plans.

Bear Stearns stock price has been falling over the past year, since its high of $171 last January. Last March the stock price was at about the $160-per-share level, and had dropped further over the ensuing months, to about $87 a share around mid-February.

One can imagine the shock and horror when that $2 per-share price was first announced at the end of last weekend. Bear Stearns employees, still reeling from the sudden demise of their once-untouchable employer, not only face the prospect of losing their jobs, but also the loss of their life savings.

One-third of the firm's 14,000 employees effectively own the company through holdings of Bear Stearns stock. The long legacy of the company, together with a merit-driven culture begat a great deal of loyalty. Employees might be forgiven for putting all of their retirement eggs in one basket, as many Bear Stearns employees had done.

While that may not be the most prudent thing to do within the context of sound investment strategy, given the proud history of the company and its consistent performance through good times and bad—countless recessions, and the Great Depression among them—there was little to give employees cause for concern. While shares in the company have dropped over the past year, other players in the market have had an equally rough ride over the sub prime mortgage meltdown. Most lenders and traders with high exposures in the mortgage market posted record losses and write-downs at the end of 2007.

With talk of a looming recession, most have been steeling themselves for a rough ride in the markets over the next while, until things pick up—as they almost inevitably do, given time.

But no one was prepared for the sudden fall of Bear Stearns, and the downward spiral of the stock price from the $170 range, to $2 in little more than a year.

Tech stocks, maybe. Investors got in, and got out just as fast before the dot COM bubble burst.

But grand old Bear Stearns? It was a company built by the calm and steady, but aggressive hand of former CEO Ace Greenberg. The current Chairman of Bear Stearns' Executive committee and a member of the Board, Greenberg at 80 still comes to work every day and still re-uses his paperclips. His very presence at the office in the Bear Stearns tower speaks to the heritage of the grand, old company.

The current situation is a scene right out of a horror movie, with people losing their life savings overnight. One employee told the Wall Street Journal that he had lost $600,000 in Bear Stearns stock, assuming a final sale price of $2 per share to JP Morgan Chase. Another told the WSJ she had lost $400,000.

Any rise in the share price at the point of sale—now offered at $10 per share, but could go higher if there are rival bids—would mitigate those losses. But a better deal than the initial share bid of $2 per share, a figure supported by the Fed, still doesn't answer why Bear Stearns suddenly found itself in such dire straits.

Many, it was reported in the Wall Street Journal, blame the firm's leadership for failing to bolster the company's financial position. One employee made the point that just a couple of weeks prior, company executives were stating that they did not need to raise more capital. And yet, about a dozen days later they were preparing to sell the entire firm for barely a quarter of the value of the actual building.

Yet another pill to swallow was the inability of Bear Stearns employees to sell any of their shares, due to a blackout period prior to the release of the Bear's earnings statement.

While the situation is still very much at play, it is still a given that investors in the company, and especially employees or former employees with Bear Stearns stock in a 401(k) retirement plan will incur substantial losses resulting from the dramatic turn in the fortunes of a once-proud firm. A turn that many blame on the firm's willingness to expose itself to a great deal of risk in a weakening market, without taking the necessary action to avoid the crisis Bear Stearns now finds itself in.

At the end of the day, the executives making those decisions will come out fine. Pity the same thing cannot be said for many of their employees who face the prospect of not only losing their jobs, but also their life savings—and the sudden realization of a retirement plan either dashed entirely, or severely curtailed.

A class action lawsuit on behalf of investors, and retirement investors is being considered, and will most assuredly move forward pending the outcome of the Bear Stearns saga.