Bear Stearns Collapse Costly to Many

MICHELE NORRIS, host:

The collapse and takeover of Bear Stearns wiped out billions of dollars in shareholder value in a matter of days. The investment bank's employees were some of the biggest losers. But NPR's Scott Horsley reports that a number of large mutual funds also saw the value of their Bear Stearns holdings plummet.

SCOTT HORSLEY: Bear Stearns employees owned about 30 percent of the company's stock and there was a strong culture of employee buy-in. Today, those 14,000 employees are worried not only about their jobs, but also their savings. On Wall Street, it's not unusual for bonuses and retirement contributions to be paid in the form of company stock. Financial planner Greg Sullivan says the cliff dive that Bear Stearns share took is a painful reminder that bank employees should follow the advice they give clients and diversify.

Mr. GREG SULLIVAN (Financial Planner): Some of those people are going to have to start all over. Yet, people with not just a few thousand dollars of their wealth in there, but, you know, tens of millions - and these are smart, wealthy people that just went down financially. You know, they took a lifetime building it up and it just took a week for it to disappear.

HORSLEY: Some big mutual funds also lost big betting on Bear Stearns. Vanguard's Windsor II Fund owned millions of shares. Windsor II is a so-called value fund that looks for stocks that may be out of favor in the market and therefore, priced too low. Mutual fund analyst Dan Culloton of Morningstar says Windsor II's manager started buying shares of Bear last summer after the company reported trouble with two of its hedge funds that had invested in mortgage-backed securities.

Mr. DAN CULLOTON (Senior Fund Analyst, Morningstar): He thought it was cheap then and even bought more after former CEO James Cayne stepped down.

HORSLEY: That was just a couple of months ago when Bear's stock was still selling for as much as $90 a share. Like Vanguard Windsor II, Legg Mason value was another mutual fund that figured the price was a bargain.

Mr. CULLOTON: The idea was that a lot of the bad news was always priced into the stock as they saw it, and they saw a good franchise that they thought was going to come out on the other end of this thing. Obviously, that has turned out to be quite different.

HORSLEY: The sell-off accelerated last week as the price of Bear shares fell from $70 to just $30. By the time JPMorgan Chase swooped in to pick up the pieces, the price was down to just $2.

Mr. CULLOTON: And it's a very, very dramatic movement. But if you remember a few years ago, Enron unwound very quickly and there were a lot of managers who were caught holding the bag that time.

HORSLEY: Some disgruntled investors are looking for a way to recover what they've lost. The first class-action lawsuit has already been filed, and securities lawyer Peter Burke says he's heard from dozens of investors who believe they were misled.

Mr. PETER BURKE (Securities Lawyer): About five days ago, you have the CEO of Bear Stearns, Alan Schwartz, telling them that there's no problem with liquidity, they have a cushion, that there's nothing to worry about, and you have a lot of folks who are relying on that information. We've had an inquiry from one individual. He bought 2,000 shares on March 14th, he sold them today and he lost $56,000.

HORSLEY: If it's any consolation, CEO Schwartz's own investment in Bear Stearns lost about $28 million over the weekend. For most mutual fund investors, the loss is much more diluted. Morningstar's Dan Culloton knows there may even be some upside. Both Vanguard Windsor II and Legg Mason value have much bigger investments than JPMorgan Chase and those shares were up today.

Scott Horsley, NPR News.

BLOCK: Chances are, you still have some questions about Bear Stearns, the Federal Reserve, the credit crisis, or how all these things have affected the financial markets. If you want to know more, send us your question and put the words money question in the subject line. Later this week, we'll bring in some experts to help you get the answers. Once again, if you have specific questions about what's been happening in the world of finance, go to npr.org, click on Contact Us, then select ALL THINGS CONSIDERED and title your note, money question. Transcript provided by NPR, Copyright NPR.