West Palm Beach (HedgeCo.Net) – It took merely minutes for one of the biggest collapses in Wall Street history to unfold.  Bear Stearns, who was rocked by the subprime mortgage crisis and the resulting $3 billion in write-offs that followed, seemed as if it would weather the storm and prevail. 

However, when investors rushed to clean out $17 billion last week amidst speculations of a cash shortage,  Bear Stearns was forced to accept a not-so-attractive offer.  JP Morgan came out the big winner, acquiring the 5th largest securities firm for a paltry $2 a share.  Backed by the Federal Reserve, it was a no-brainer for JP Morgan CEO Jamie Dimon, who agreed to purchase Bear Stearns for $240 million. 

Others, however, didn’t fare so well.  Here is the list of the 7 Biggest Losers in the Bear Stearns buyout:       

1.  Joe Lewis

The British billionaire nicknamed the “Boxer,” who owns 10% of Bear’s shares, lost a total of $800 million in the collapse.  Lewis began buying shares last September, when they were going for around $100 a share.  Building his fortune from risky bets in sports and real estate, Mr. Lewis was one of the most renowned currency speculators in his generation.  Almost half of his fortune has been wiped out in a matter of days.

2.  Alan Schwartz

The Bear Stearns CEO, who had only held the position for three months, was forced to accept the deal presented by JPMorgan with about as much enthusiasm as an inmate accepts a death row verdict.  This came only days after he assured investors that the company’s “liquidity cushion” was sufficient enough to cover their losses.

3.  Hedge Funds

While the panic last week may have sparked the buyout, Bear’s troubles can really be traced back to its two failed hedge funds in the summer 2007.  After losing $1.6 billion of investors money after buying mortgage backed securities, Bear Stearns was forced to close up shop on the High-Grade Structured Funds.  Investors were left with nothing more than an apology.  They pulled together to sue Bear Stearns in an attempt to reclaim some of that money, but for some, the situation magnified the risk involved in hedge funds, even ones backed by reputable names.   

4.  Barrow, Hanley, Mewhinney & Strauss 

The Dallas-based money management firm had a 9.7% stake in Bear Stearns at the end of 2007.  With almost 30 years in the industry, the firm had a stellar reputation in the investment world.  It’s estimated loss is $991 million.

5.  The Federal Reserve

The Fed’s actions lately remind me of that old saying… feed a mouse a cookie, he’s going to want some milk.  Except in this case, the mouse is more of a monster and his name is the American economy.  I understand the notion of providing a “push” here and there.  But providing JPMorgan with $240 million to buy Bear Stearns?  Jamie Dimon could’ve found $240 million in his couch cushions.  It was a complete no-brainer.  It’s not as if Bear Stearns has no redeeming qualities.  Last year, their Prime Brokerage unit amassed $1.2 billion in profits, mainly from all of the hedge funds that it does business with.  JP Morgan is going to capitalize on this sector, and the Fed has allowed them to do so with absolutely no risk to them whatsoever.   

The Fed proceeded to announce that they had cut the interest rate on direct loans to banks, in a further effort to deter panic in the market.  However,  many fear that companies are becoming much too reliant on this “crutch,” and there will come a time when even the Fed won’t be able to save us.             

6.  James Cayne

The former Bear CEO turned non-executive chairman, first had to report an $854 million fourth-quarter loss, the first in the company’s history.  With $1.3 billion in assets last year , Cayne was ranked the richest CEO by Forbes magazine.  His $1 billion worth of shares that he owned in Bear are now worth $12 million. 

7.  Other Banks Tied to Mortgage Lending

The selling price for JP Morgan, which was 90% less than its market value last week, has sent shivers throughout other financial institutions who have written down massive losses as of late.  Ohio’s National City Corp. and Washington Mutual fell 47% and 17% today, respectively, and both may be seeking a buyer for rescue.  With JP Morgan out of the picture for at least the next year, the pool of potential buyers is drying up fast.

Julie Scuderi
Senior Editor for HedgeCo.Net
Email: julie@hedgeco.net

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