Bear Stearns and the stench test

Well, I guess we’re all long-term investors again. Isn’t that the advice we receive from financial planners and others every time the stock market tanks? Well wahoo. We’re in for a wild ride.

I learned while running on the treadmill this morning that the Federal Reserve took drastic action yesterday to help calm jittery financial markets and that JP Morgan is going to acquire Bear Stearns for the fire sale price of $2 a share. Better that I ran outside and took my chances with the garbage trucks at 5 a.m. Running is becoming less stressful these days than the news reports.

But I’ll admit that this is another example of why I am delighted that I am no longer working in corporate public relations. Some poor smuck in the PR organization at Bear Stearns will have to try to explain all this to investors, employees, reporters and others. As far as I can tell it looks like the explanation could be fairly simple: mismanagement and greed. Want to bet you won’t see that in any news release that Bear Stearns distributes any time soon.

Yet here’s what you did see in a press release the bank issued March 10.

The announcement said in part:

New York — New York — March 10, 2008 — The Bear Stearns Companies Inc. today denied market rumors regarding the firm’s liquidity. The company stated that there is absolutely no truth to the rumors of liquidity problems that circulated today in the market.

Alan Schwartz, President and CEO of The Bear Stearns Companies Inc., said, “Bear Stearns’ balance sheet, liquidity and capital remain strong.”

OK. Good. Let’s get back to seeing what Britney is doing today.

But then on March 14, Bear Stearns had another announcement:

Bear Stearns Agrees To Secured Loan Facility With JPMorgan Chase

New York – New York – March 14, 2008 — The Bear Stearns Companies Inc. announced today it reached an agreement with JPMorgan Chase & Co. (JPMC) to provide a secured loan facility for an initial period of up to 28 days allowing Bear Stearns to access liquidity as needed. Bear Stearns also announced that it is talking with JPMorgan Chase & Co., regarding permanent financing or other alternatives. (Note press release as more info if you are interested.)

Ouch. I’m no banking expert. And maybe there was enough of a run on the bank during those four days to change the situation to the point where Bear Stearns had to arrange a loan agreement with JPMorgan. Still, call me skeptical — but something here doesn’t meet the stench test.

In my ethics class at Kent State we use Rushworth Kidder’s How Good People Make Tough Choices. He writes:

The stench test, relying on moral intuition, is a gut-level determination. Does this course of action have about it an indefinable odor of corruption that makes you (and perhaps others) recoil and look askance?

Something about what happened at Bear Stearns during the past few days just doesn’t smell right to me. Maybe the government will pursue this with as much enthusiasm as it had for exposing Eliot Spitzer and “Kristen” last week. Probably not. But we’ll see.

In the meantime, I’m on spring break. And I know that somewhere in New York today the public relations staff at Bear Stearns is noodling over the magical words that will make this debacle go away.

Good luck to them. And all of us.


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