Bear Stearns reached a deal Sunday to sell itself to J.P. Morgan—at a fire-sale price. J.P. Morgan will pay $2 a share for the teetering bank, less than one-tenth of the price that its shares were trading for on Friday. That day, Bear’s stock plunged 47 percent to close at $30. Just a year ago, Bear shares were trading at $170.
Recruiters say Bear advisors are very determined to leave, but the deal at least buys them some time to look for a new home. J.P. Morgan is not a great fit for Bear Stearns advisors for a number of reasons, says recruiter Mindy Diamond of New York-based Diamond Consultants. For one thing, most of their advisors fit into two buckets: they are either private bankers who cater to ultra high net worth clients only ($10 million and up) and get paid on salary and bonus, or they are bank-branch brokers. Bear advisors are commission-based, tend to have clients all over the map, and are accustomed to a more entrepreneurial culture. And two, J.P. Morgan bought Bear at bargain-basement prices, and may not be planning on offering the advisors any retention package.
“The bear brokers just watched much of their net worth go up in smoke,” says Diamond. “So making a move could be the most immediate and best wealth-replacement strategy.”
Bear advisors are certainly not lacking for offers. They were inundated with calls over the weekend from branch managers and CEOs of other brokerages or financial advisory firms, says recruiter Danny Sarch of Leitner Sarch Consultants. “They went from disbelief to resolve to panic back to resolve,” says Sarch. “I talked to a bunch of people over the weekend, and they have a lot of hurt because they have a lot of net worth wrapped up in the stock. There is very little sense among the advisors of wanting to stay in the combined firm.”
Most Bear advisors will wind up at the wirehouses by default, says Diamond. “They don’t see themselves as wirehouse brokers, but the deals are so large it will be hard to ignore them,” she says. “Those with really high-net-worth books might wind up at places like Lehman, Jeffries and Goldman Sachs. Some will like the more entrepreneurial regional firms, like Raymond James, but these names might not have the cache to give their clients comfort. They’re dealing with a whole lot of nervous clients.”
Bear was pushed almost to the point of bankruptcy by bad bets on mortgage-related securities, and panic about the bank’s financial condition spurred the equivalent of a run on the bank. J.P. Morgan, meanwhile, is one of the few major U.S. banks to remain relatively unharmed by the subprime crisis.
As part of the deal, J.P. Morgan and the Federal Reserve will guarantee the “huge trading obligations” of the bank, according to a New York Times article. The Fed will provide financing for the transaction, including as much as $30 billion to shore up Bear Stearns’s “less-liquid assets.”
Over the weekend, the Fed took additional measures to protect the financial system, including extending an open-ended lending program for the major Wall Street investment banks. Some analysts fear that other financial powerhouses that have been battered by the subprime crisis, like Lehman Brothers, could suffer additional blows. The Fed also lowered the rate for borrowing from its so-called discount window by a quarter of a percentage point, to 3.25 percent.