Friday, March 28, 2008

The fall of Bear Stearns........

About a third of the outstanding shares of Bear Stearns were held by employees. The average broker at Bear Stearns, they had about 500 brokers, was making about $500,000 on average commissions of $1,100,000 per year, well above the Merrill Lynch average per broker per year of between $750,000 and $825,000. Never forget, the salesmen generate the commissions from client investors whether markets are up or down. The economic role of a client for a brokerage firm is to enrich the brokers and the brokerage firm, they are not fiduciaries like Chippewa Partners. Brokers are trained to sell investments that generate fees and commissions and unfortunately often have an agenda other than an investors financial welfare as evidenced by the large number of rogue brokers and arbitration cases brought by investors against firms. I was an arbitrator for the New York Stock Exchange and the NASD for over 10 years and you would have a hard time believing the carnage that goes on out there in the real world. It is frankly disgusting. The interests of Wall Street and the media are not aligned with those of investors. The NASD makes it very clear; investors should never let their guard down with brokers who have a sales agenda.

This debacle is another great lesson for all investors to stay diversified no matter how big or great or fabulous your company's stock is. Jimmy Cayne, Bear's CEO provided a lesson in fooldom. His tournament bridge-playing while the firm tumbled will be fodder for the ages at Harvard Business School. Unfortunately, the financial fortunes of many were impacted by a select few at the top. Lack of risk controls across all areas of the firm were lacking. Wall Street is notorious for poor managment because of the massive compensation at stake. Management often lets trading desks take the firm down and this will happen again and again as it has throughout the last few decades. Call it asinine, call it stupidity just call it what it is.

Human nature and desire for the almight dollar? Call it greed.

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