Penance for Bear's Bankers

The words "suffering" and "banker" do not go together often. But the rescue of Bear Stearns, the Wall Street investment bank, last week, is a rare case of their collision.

When the U.S. Federal Reserve engineered the takeover of Bear Stearns by JPMorgan Chase, it endorsed the virtual wiping out of Bear's shares, one-third of which are held by Bear's 14,000 employees. Jamie Dimon, JPMorgan's chief executive, offered $2 per share, or about $237 million, for a bank that was worth $20 billion at its peak and $9.5 billion only a month ago.

In the past decade, as global financial markets have boomed, hedge funds and private equity firms have proliferated, and investment bankers' traditional half-share of all the money their banks earn has produced annual bonuses reaching into the tens of millions of dollars, the rest of the world has looked on with envy and not a little financial resentment.

House prices in prime districts of New York and London inflated beyond the reach of those who were not financiers, restaurants were crowded out, private schools filled to capacity. Those with a job on Wall Street or in London became the "haves" and pretty much all others were the "have-nots."

Yet, even when something went badly wrong at these institutions, their leaders walked away with millions of dollars more. Both Chuck Prince and Stan O'Neal, the former chief executives of Citigroup and Merrill Lynch, respectively, were handed tens of millions of dollars in deferred compensation -- shares they were not due to receive for another year or more. As the housing slump in the United States has spiraled into a credit crisis and central banks have been forced to intervene to stop the collapse of Northern Rock and Bear Stearns, the taxpayer has had to stand behind institutions that acted as gigantic slot machines for those who worked there. Rightly, people outside the gilded class do not think this is fair.

Moe Tkacik, a writer for the New York-based blog Jezebel, channeled banker-hate eloquently last week: "They chose this path, you know. They chose to worship Ayn Rand and wear those Paul Smith shirts and pay zero money down on their Hamptons summer homes and, obnoxiously, whenever confronted by someone like myself at a bar, claim that the market solves everything. Let the market solve this one for them."

The New York Times phrased it like this: "Bankers [get] stellar rewards when the investment strategies do well yet [have] a floor on their losses when they go bad. They might have to forgo a bonus if investments turn sour. They might even be fired. ... But as a rule, they won't have to return the money they made in the good days when they were making all the crazy bets that eventually took their banks down."

Right on! But cool down and consider Bear.

In this case, for once, bankers are hurting. Like other investment banks, Bear paid most of its employees' annual bonuses in deferred stock. A trader might get a $1 million bonus, but a lot of that was paid in shares that only vested after three years. The idea was to keep him loyal and give him an incentive not to take "crazy bets" that would blow up later.

After the Fed rescued Bear to head off a firesale of mortgage securities, it encouraged JPMorgan to make such a low bid that almost all deferred compensation was wiped out. It wanted to avoid moral hazard or, in plain language, to teach bankers a lesson they would not forget. In the space of three weeks, the stake owned by Jimmy Cayne, Bear's wayward chairman and former chief executive, went from being worth $500 million to $12 million (at the peak, he was a billionaire). A swathe of employees lost millions, and about half are likely to lose their jobs once JPMorgan swallows up their bank and its building on Madison Avenue.

The prevailing mood at Bear is a mix of despair and anger. Dimon walked over to Bear on Wednesday to address 400 shattered Bear executives. Alongside him was Alan Schwartz, Bear's chief executive, who was quoted in The New York Times telling the group that "we here are a collective victim of violence."

Schwartz's beef seems to be that Bear collapsed because hedge funds and other banks withdrew their business and credit lines, making it insolvent.

Bankers are human too. They have families and, if you prick them, they probably bleed. But it is both justice and good practice for the perpetrators (not, Schwartz, the victims) of this financial debacle to suffer. Easter is the season for forgiveness, but you must make penance first.

John Gapper is a columnist for the Financial Times, where his comment appeared.