Bear Stearns Bailout?
I noticed this little snippet on Yahoo! Finance this morning:
“In financial news, Bear Stearns (nyse: BSC - news - people ) Chairman James Cayne sold his entire stake in the firm for $61 million. Before its collapse, his investment was valued at around $1 billion.”
Webster’s define bailout as “rescue from financial distress.” If my stock had gone from $1 billion to $61 million, I don’t think I would feel rescued. In fact that kind of loss might make me want to jump off a bridge. I’m sure everyone at Bear Stearns is still very distressed as well. The Fed certainly rescued them from collapse but distress is a another story. Bear Stearns is still very much distressed. It seems their employees are trying to head for the hills.
I commented on bailouts in an earlier post, that time in the context of bailing out troubled borrowers. Let’s look and see if the Bear Stearns “bailout” is likely to be a moral hazard. Let’s take a look at that chairman who just cashed out for pennies on the dollar. Let’s consider what his cost basis on that stock is: let’s be conservative and say he received it as compensation at $30 a share and held through the whole debacle. If he received it as compensation he owed at the time 38% + whatever his state/local tax rate is (we’ll use 5% in the example), so 43% in taxes. So he received $183 million in stock compensation and paid $78 million in taxes on it. That $61 million he received from the sale of the stock doesn’t even cover his tax bill. Mind you he now has several lifetimes worth of $3000 capital loss carryover deductions but I don’t think that will make him feel much better…
Do you really think this guy is going to repeat the same behavior again expecting a “bailout?” He paid more in taxes than he got back from the “bailout.” I really don’t think there is a moral hazard here. Clearly this guy is not going to try the same shenanigans again unless he’s too stupid to see that he paid more in taxes than he got back from the government “bailout.”
Let’s compare this to a borrower bailout scenario. The borrower has $0 in savings and buys a house creatively financed with 0% down. After 1 year the borrowers teaser rate resets and can’t make payments. The borrower screams to the media that the “the evil banks are going to take my house.” Government steps in and makes the bank lower the principle amount of the loan and finances it at a subsidized low rate. The reckless borrower gets to stay in house on the cheap and loses nothing. What disincentive is there to prevent the borrower from doing this again? There is no disincentive that I can see and this example clearly exhibits a moral hazard.
I think the claims of calling for bailouts of borrowers to go along with bailouts of banks are unfounded. Hopefully the media will get the picture.
