Bear Stearns ESOP: Employees make significant loss

Not only the investors, but also the employees of the recently bursted Bear Stearns company are facing the heat of losses.

As I've explained in my previous article, Whether employee should opt for ESOPs?, the Bear Stearns employees have lost miserably on their stock holdings.

Employees owned almost 35% or one-third of Bear Stearns Stocks. With the collapse of the financial giant, these employee stock holdings have gone to zero value, making all their investments a 100% loss making venture.

An employee who acquired Bear Stearn's stock anytime from 2004 through 2007 stands to lose at least 97 percent of his investment if this deal closes.

Repeatedly, people keep taking about diversification. But they fail to diversify between their jobs and other sectors. Buying ESOP's or stocks of your own company is nothing but making a fool of yourself. If the company does well, you make fortune. But if it fails, you end making loosing entire money - your job is gone, so is your investment.

hence, be careful when buying stock options. They are not good from the diversification point of view.

How Bear Stearns failed

What went wrong with Bear Stearns?
Why was Bear Stearns sold out just for $2 a share when just sometime back its share price was as high as $150 per share?

I’ll keep it short and simple. It was the subprime mortgage crisis that led to the fall of Bear Stearns.

Related: My view of Subprime Mortgage Crisis

How the 85 year bank Bear Stearns fell prey to subprime mortgage crisis? The real culprits are various investment banks – including Bear Stearns itself. These banks have to do business – with customers, high net worth individuals, with governments and with each other. They keep coming out with new and “innovative(?)” financial securities and instruments, which they trade with each other. In case of Subprime mortgage crisis, the same investment banks came out with a nice piece of mortgage backed financial securities.

What has happened is as follows: Subprime mortgages (basically loans to credit less individuals) were offered by the various real estate mortgage lenders (including different arms of big investment banks). Since they were offering loans, they required money to back them up. Hence these banks came out with “mortgage backed securities” and sold them to each other. These were the financial instruments, which had the guarantee of the real estate or houses that were sold through subprime mortgages.

However, when the subprime mortgage loan borrowers defaulted, these mortgage backed securities also went for a tailspin. The culprits were these investment banks who failed to realize the risks involved in these subprime mortgage backed securities and sold them aggressively. Bear Stearns is just one example of how one bank with 85 year old reputed history has fallen prey to market conditions.

Let’s also not forget what has happened with Northern Rock bank of UK.

Hopefully, this will be a new lesson to people who blindly keep on buying shares believing that banks are safe and have proper risk management systems.

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