The news that something like one-third of Bear Stearns stock, which ain’t worth what it used to be, is in the hands of employees has raised lots of hue and cry about the idiocy of putting your retirement savings in company stock. Writes Megan McArdle:
Unbelievable. Five years after Enron and WorldCom went down, taking not only thousands of jobs but most of their employees’ retirement savings with them, we are hearing the same old song: Bear Stearns 401(k)s were crammed full of company stock.
…What is the proper amount of your investment portfolio to have in your company’s stock? In my opinion, zero.
Agreed, if you’re talking about retirement accounts for rank-and-file workers. But there’s actually no evidence that the 401(k)s at Bear Stearns were crammed full of company stock. Writes friend-of-this-blog Corey Rosen of the National Center for Employee Ownership:
For the broad employee population, there was an employee stock ownership plan (ESOP) that held about $285 million in Bear Stearns stock in 2007. The plan was funded by the company. This was not, however, the sole, or even main, retirement plan at the company. In addition, there was a profit sharing plan funded by the company that had about $300 million in diversified investments and a 401(k) plan with $720 [million] in diversified investments. So from a retirement plan standpoint, Bear Stearns is not at all like Enron and some other companies several years ago where employees were heavily or primarily invested in company stock, generally in their 401(k) plans, and were left with limited or no retirement assets after their companies melted down. The ESOP accounted for about 3% of total Bear Stearns Stock.
So who were those employees who owned a third of Bear Stearns shares? For the most part, they were the top executives, investment bankers, traders and brokers who got shares via the company’s capital appreciation, restricted stock, and stock option plans. According to Bear’s 2007 proxy statement, the eight members of the firm’s executive committee owned 9% of the stock. And given the way investment banks work, there were probably lots of bankers and traders who made close to as much as (or more than) some executive committee members, and owned similarly large amounts of stock. So Bear’s employee stock ownership was almost certainly heavily concentrated among the top employees whose actions were most likely to affect the value of the stock.
The idea behind piling stock onto these top executives and top performers, and encouraging them to hold on to it and even buy more (which seems to have been the ethos at Bear), was to align their interests more closely with those of the firm and its outside shareholders. It was to get around the much-discussed problem of paying people now for deals that will likely sour later. It was to help make Bear’s big moneymakers more cognizant of the long-run risks they were running.
Clearly, this didn’t work in Bear’s case. (Jimmy Cayne’s 5.82% stake in particular doesn’t seem to have succeeded in adequately diverting his attention from the bridge table.) But is it such a horrible idea? I don’t think so.