Who’s Looking After Momma?
Bear Stearns strayed from its core business.
Powered by greed, the firm got into creating indecipherably complex investment funds designed to cover the tracks of indecipherably complex consumer home loan contracts.
Nobody understood this stuff. Not Bear Stearns’ managing directors, not the sales people hawking this fatuous crap. Not the greedy investors that saw obscene returns. Not the original mortgage lenders. And certainly not the dodos who got way in over their heads borrowing to buy homes by signing adjustable rate mortgage contracts that sucked them dry.
But hey, if I was a renter and was offered a $220,000 loan to buy a $200,000 home, who is the dodo—I or the lender? I get to live like royalty, and if I find I cannot afford it, I become a “mortgage walker” who hands the house keys to the lender and says ta-ta.
The operative rule of thumb: If a thing looks too good to be true, it is.
This past week, myriad lives have been turned topsy-turvy because this rule was ignored.
The Bear Stearns debacle
One of my oldest friends has been a honcho at Bear Stearns for 30 years. He was flying high when, in January 2007, the stock hit its peak of $172.61. Last Sunday, at the Fed’s behest, JPMorgan bought the company for $2 a share.
I don’t think that my friend’s losses match those of British currency gambler Joseph Lewis, who has taken an estimated $800 million bath, or Bruce Sherman of Naples, Fla., who was sitting on 5.5 million shares.
But one-third of the company is owned by the 14,000 employees. Many will be jobless with their savings wiped out.
Lives turned topsy-turvy.
I hope my friend has diversified investments.
I once had a highly dubious client named Jerome Schneider whose business was turning greedy investors into offshore bankers—helping them set up banks in the Cayman Islands, Grenada, Montserrat, Vanuatu and the Cook Islands. The object was to enable them to: (1) hide money from the IRS and (2) take trips to their banks in exotic locales and write them off as business expenses. Schneider stiffed me on a payment and shortly thereafter did six months in jail.