'Marketplace' Report: Bailout's Effects on Workers

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Bear Stearns traders and dealers have seen the value of their stock share plummet and their futures put in jeopardy. Marketplace's Janet Babin explains that Bear Stearns employees may try to find new jobs, but with a recession looming, it's not going to be easy to find work.

ALEX COHEN, host:

As we've just heard, Bear Stearns stock is going for less than a latte at Starbucks. Not a great morning to be a Bear Stearns investor, but maybe it's even worse for the people who work there. The brokerage firm employs 14,000 people. While no layoffs have been announced yet, employees' futures must be uncertain at best.

MARKETPLACE's Janet Babin is here with us. And Janet, Bear Stearns employees, we should begin by saying, don't actually work for Bear Stearns anymore, right?

JANET BABIN: That's right, Alex. This morning employees were told that they now work for JP Morgan. And of course they don't know how long they'll have that deal.

In addition to that news, as you've been saying, you know, they found out that their company stock, which at one point this summer hit $170 a share, is now worth about a latte or less than that.

I spoke with Huge Johnson this morning about what these staffers must be going through. He's chairman of the money management firm Johnson Illington Advisors. And he says Bear Stearns employees are probably more worried about their stock and their retirement right now than about their jobs.

Mr. HUGH JOHNSON (Chairman, Johnson Illington Advisors): Most of the employees had a significant percentage or a meaningful percentage of their assets tied up in Bear Stearns stocks. And now, of course, there's been a firesale, and the value of their nest egg has been reduced considerably.

BABIN: Now, according to one report, at least 30 percent of Bear Stearns stock is held by its employees. And for a lot of traders and other employees at Bear Stearns, the majority of their pay comes from company stocks. So a lot of them just devastated today.

COHEN: But Janet, rumors about Bear Stearns' problems surfaced several weeks ago. So weren't employees expecting this or something?

BABIN: You know, you would think that they had their resumes ready to go, Alex. But I also think that we can't underestimate the shock value here of what that's like, to be in on Friday and to think, okay, you know, my retirement account or my kid's college - I got 30 bucks a share - and today to find out, you know, it's worth $2 a share, you know, a lot of senior staffers here - just trying to figure out how that valuation can make sense. They just weren't prepared for this sharp deterioration of their stock, and some of them are figuring maybe it'd be better off in a bankruptcy situation.

I just spoke with one Bear Stearns employee who asked, of course, not to be named, and he just said, you know, this is just devastating and we're trying to figure out how this valuation can make sense.

COHEN: And I'm sure a number of employees there must be looking for some way to get out, maybe find a new job.

BABIN: That's right, especially not the senior staffers. You know, but there've been estimates that only about 10 percent of Bear Stearns workforce will survive at all.

I spoke with Marc Freed, at fund-of-funds group Lyster Watson, about the employee fallout, and he says that he thinks the area of Bear Stearns most likely to survive is the capital introductions area, it's the marketing arm - arm, rather, of Bear Stearns' prime brokerage; that could survive, but everyone else pretty much is redundant.

And of course now, Alex, not a great time to be looking for a job on Wall Street. As we said, we're in the midst of a credit crisis and many economists believe recession is looming, if not here already. So if you're an employee of Bear Stearns and you're jumping ship, you might just find yourself landing on another sinking ship.

COHEN: Thanks for bringing us up to date, Janet. That's Janet Babin of public radio's daily business show MARKETPLACE.

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Fed's Moves Highlight Fragile State of Markets

Stock traders negotiate in Sao Paolo Monday morning i

Stock traders negotiate in Sao Paolo Monday morning. Brazil's stock market dropped amid fears the global credit crisis that sank Bear Stearns would spread. hide caption

itoggle caption
Stock traders negotiate in Sao Paolo Monday morning

Stock traders negotiate in Sao Paolo Monday morning. Brazil's stock market dropped amid fears the global credit crisis that sank Bear Stearns would spread.

Listener Q&A

It's no easy task to keep up with all the intricacies of the housing crisis, the credit crunch and the rest of the economy's doldrums. NPR's Adam Davidson and former Federal Reserve governor Laurence Meyer answer listeners' questions.

The Federal Reserve took dramatic measures over the weekend to reassure the increasingly anxious investment community, including negotiating the bargain-basement sale of Bear Stearns, one of Wall Street's biggest and most storied banks. The Fed's moves raise questions about just how deep the financial industry's woes go — and what other banks might be at risk.

Here, a look at what happened and what it means for the markets:

What was the Fed's role in the sale of Bear Stearns to JP Morgan?

The Fed extended JPMorgan Chase a $30 billion credit line to help it buy rival Bear Stearns, a firm with an 85-year history on Wall Street that was on the verge of collapsing due to losses in the mortgage market. JPMorgan is getting Bear Stearns for the rock-bottom price of about $2 a share — or about $236 million. That's a stunningly low price when one considers that Bear Stearns' shares were trading at $30 each on Friday, and that its company headquarters building in New York is valued at $1 billion by itself.

Why did Bear Stearns agree to be purchased for such a fire-sale price?

Bear Stearns really had no choice. The bank is facing an onslaught of rumors about its losses in the mortgage industry, and on Friday it reported some major liquidity problems — investors were pulling their money out and the bank was short on cash. The only way for Bear Stearns to keep doing business was to let itself be bought by another firm like JPMorgan. But the deal effectively wipes out most of Bear Stearns' shareholder wealth, and it's not clear whether it will win shareholders' approval.

What about customers of Bear Stearns? Will their investments be affected?

Bear Stearns customers will become customers of JPMorgan Chase. Their accounts will transfer automatically; they don't have to do anything, says Laurence Meyer, a former Federal Reserve governor.

What would have happened if the government had not stepped in and instead allowed Bear Stearns to go bankrupt?

Bear Stearns doesn't just have its own assets — it serves as what's called a "counterparty," meaning it works as the middleman for billions of dollars in transactions. So, working people have retirement funds there, for example, and smaller banks and hedge funds can trade stocks or securities through Bear Stearns.

If the bank did go bankrupt, an unbelievably long and complex legal process would begin. Thousands of Bear Stearns customers — from individual retirees to massive hedge funds — would have huge amounts of money just frozen. Imagine how complicated a personal bankruptcy is and multiply that by tens of billions of dollars in assets. The Federal Reserve wanted to avoid that.

What other measures did the Fed take?

Perhaps the Fed's most significant move over the weekend was the creation of a new program to give emergency loans directly to the 20 largest so-called "primary dealers." These are investment banks that do business directly with the Fed and which purchase the majority of Treasury securities.

In addition, the Fed lowered the discount-lending rate — that's the rate which it charges banks for very short-term loans — by a quarter-point, to 3.25, on Sunday. It followed that on Tuesday with a cut of three-quarters of a percentage point to another key interest rate, the federal funds rate.

Why did the Fed feel the need to take such dramatic action?

It's an indication of just how precarious things are in the financial markets. The fear is that if an investment giant like Bear Stearns fails, it could spark a run on other banks with sizable exposure to troubled credit markets, creating a domino effect of defaults.

Investment banks like Bear Stearns are the lifeblood of capital markets, providing the cash flow that keeps economic gears turning. They facilitate short-term loans to businesses, raise money for corporate expansions and IPOs and assist the trading of securities. Without them, financial markets would grind to a halt.

Does the Fed's intervention mean that things might be worse on Wall Street than they appear?

It certainly feeds those suspicions. The current credit crisis is largely being fueled by fear and uncertainty. Because they are not traded on a daily basis, mortgage-backed securities are difficult to value even in the best of times. Now that the mortgage market is in free fall, it's almost impossible to gauge just how much bad debt these banks have been left holding. That has made banks extremely nervous about making even short-term loans to each other.

Are other banks in serious trouble?

Yes, and everyone is asking who's most at risk. Some of the names mentioned most frequently are UBS and Lehman Brothers, both of which have a lot of exposure to subprime and mortgage-related securities.

Why do the markets feel comfortable with the Fed actions to help JPMorgan buy Bear Stearns, but not with government action to provide relief to homeowners who cannot pay their mortgages?

Actually, the Fed's action is quite controversial. "People do worry about moral hazard, although I think that Bear Stearns was significantly punished," says former Fed governor Meyer. The Fed has taken credit risk onto its portfolio that it wasn't really set up to do, but global investment banks are really too big to simply go out of business, he adds.

But when it comes to homeowners, it's important to understand that there are actions the Federal Reserve can take, and actions that the administration and Congress would have to handle. Helping out homeowners is up to the latter. "Again, there's moral hazard issues as to whether you should do that," Meyer says. "But the problem is so significant here ... I think you could reasonably argue that it is a time for [the Treasury Department] and the administration to put some taxpayers' money at risk here, in order to reduce the risks ... and help homeowners."

With reporting by NPR's Jim Zarroli, Chris Arnold, Adam Davidson and Uri Berliner

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