Anywhere But Here

In July 2007, his firm, Bear Stearns, announced that two of its flagship hedge funds had collapsed. Not surprisingly, clients weren't too happy about that. Many of Sharon's clients contacted him to express grievances about their losses, and concerns about the integrity and stability of Bear Stearns, according to an affadavit filed by Sharon's lawyer in a later legal battle between Sharon and Bear.

In July 2007, his firm, Bear Stearns, announced that two of its flagship hedge funds had collapsed. Not surprisingly, clients weren't too happy about that. “Many of Sharon's clients contacted him to express grievances about their losses, and concerns about the integrity and stability of Bear Stearns,” according to an affadavit filed by Sharon's lawyer in a later legal battle between Sharon and Bear. As a result of the demise of the two hedge funds, Sharon lost “a number” of clients, who took “several hundred million dollars invested with Bear Stearns” to other firms, the document said. (Sharon told us he also had over $500 million of his own money in the hedge funds.)

But Sharon stayed on — that is, until the Federal Reserve orchestrated a bailout in March, by J.P. Morgan. That was too much; it was time to move on. And so he did, joining Morgan Stanley. For that, and despite his prior loyalty to Bear, where he had worked for over 20 years, Sharon — who had generated millions in fees for himself and his firm by managing over a billion dollars for high-net-worth retail and institutional clients — was hit with a temporary restraining order (TRO). (Firms use TROs to prevent advisors from leaving with their books of business intact; because the restraining orders can lock up client assets for weeks, they are increasingly frowned upon by regulators.) Why wouldn't Sharon have wanted to leave? After all, on the morning of Friday, March 14, the day the Fed stepped in to save Bear, there was a run on assets at Bear — clients had demanded about $12 billion be returned to them. But the firm could only come up with $5 billion in cash, as Sharon later learned.

“I received countless phone calls from panicked investors demanding that their assets be pulled out of Bear Stearns immediately,” Sharon said in the affidavit, submitted in a legal challenge to Bear's TRO. “I received wire requests from my clients to transfer out cash in excess of $100 million, which were ultimately not completed because Bear Stearns had run out of cash.” In the end, a U.S. District Court judge denied Bear's TRO request.

No, you didn't want to be a financial advisor at Bear Stearns during the week of March 10. That was the week that news broke about Bear's serious liquidity problems, and the week it had to be bailed out. By the start of the next work week, Bear had agreed to be bought for the fire-sale price of $2 a share, less than one-tenth of what the bank's shares had been trading for the previous Friday. (The acquisition price was later raised to $10 a share.) The 85-year-old investment bank had no choice, having gorged itself on collateralized debt obligations and leverage.

The forced sale was embarrassing, since many of Bear's Private Client Services advisors had been assuring clients that their investments were safe, and that the firm had capital — the firm's chairman, Alan Schwartz, had even appeared on television just a week before, on Wednesday, March 12, calling the liquidity rumors “totally ridiculous.” That appearance “gave me all the confidence I needed,” says one Bear advisor. But the following Monday, Bear Stearns — and its roughly 500 retail financial advisors — found themselves in the financial embrace of competitor J.P. Morgan Chase, headquartered just one block away.

Gotta Go, Gotta Go Right Now

It's hard to know exactly how many retail reps have decamped Bear, but recruiters say they are in high demand. The exodus is said to have worried Dimon enough that he made personal calls to Merrill CEO, John Thain, and Morgan Stanley head, John Mack, asking them to hold off on poaching Bear reps until he'd been able to offer them a retention deal. How the executives have, or will, respond to Dimon's plea is unclear, but Bear advisors may need some convincing. Those who left say they had little choice: Not only were their clients unhappy, but J.P. Morgan, a big money center bank, just isn't a good fit for Bear's sophisticated, entrepreneurially-inclined reps. “The biggest question Bear brokers are asking themselves is, ‘How will the firm change?’” says one industry consultant. “Bear had a unique culture, and now it's owned by a bank“

And so, rivals are picking off some of Bear's top advisors. Less than a week after the takeover announcement, Morgan Stanley had already snatched at least 12 Bear Stearns advisors (including Sharon), whose combined revenue totaled over $26 million. Sharon, once an executive director at Bear's Boston office, had over $1.5 billion in assets under management, and annual production of over $5 million alone. Another Bear-to-Morgan defector has assets under management just under $1 billion, with nearly $4 million in production. Smith Barney hired at least three Bear brokers before the end of March. Robert Bregman joined Smith Barney's Boston office with over $1 million in production, and Robert Mason and Patrick Corbett both joined the firm in New York with a team production of $2.4 million.

“Every recruiter is all over [Bear Stearns' advisors.] They are sophisticated sales people who have no problem finding a good job someplace else,” says Rich Schwarzkopf, president of Schwarzkopf Recruiting Services. Industry recruiters say the deals offered to Bear's top producers are along the same lines as they've been for the best advisors in the country in the last year, reaching as high as 270 percent of trailing 12-month production in some cases, and stretching over seven to nine years. Even boutique firms like Lehman Brothers and Credit Suisse have offered upfront, forgivable loans “far, far higher than they ever have” says one recruiter. The fact that they're offering deals at all is pretty significant: They usually don't offer anything upfront. Deutsche Bank, with over 235 retail advisors in its Alex. Brown unit, is said to have come up with “10 huge packages for 10 groups or individuals at Bear.”

Embarassment over the firm's meltdown, and the anger of clients, would have been bad enough. But the sale to J.P. Morgan also means a lot of advisors saw big chunks of their net worths go up in smoke. With the sudden and precipitous share-price drop, some stock options simply became worthless. “I went through all the stages of grief: shock, regret, sadness, anger and hope,” says one advisor. “But then you have to resign yourself and move on. Many of us have been here our entire lives. There was a culture that was promoted [by management] about never selling [company stock]. They said, ‘Never sell! Never sell!’ and people here never did sell, but they ended up losing millions. One day you're at $80 [a share], the next day you're at $2. It's hard to stomach,” he adds. He would not comment on how much he'd personally lost, but says it was a significant amount.

Another former Bear broker says he's $3 million poorer (with the $10 per share sale price). And that was too much. He and his colleagues jumped ship. “We'd just lost our entire net worths, and we had clients saying they'd flee if we didn't get out of Bear,” he says. “Meanwhile, you're expected by J.P. Morgan to just sit there, not knowing whether you're going to get a retention deal, or even have a job next week?”

One Big Happy Family … Perhaps

And yet, many Bear advisors are sitting tight. A J.P. Morgan spokesman says it's too soon to say how many advisors will end up staying, but, that the retention program “is going very well.” To keep defections low, Dimon offered Bear advisors with at least $500,000 in production 75 percent of trailing 12-month production in cash, and another 25 percent in J.P. Morgan stock upfront. They will be eligible to receive an additional 50 percent in cash, and 50 percent in stock, based on their average production over the next three years. For advisors in the $250,000- to $500,000-production range, Dimon offered an upfront deal with 25-percent cash, and 25 percent in stock. Bear reps producing under $250,000 were not offered a deal. Reps deciding to take the deals will be required to stay with J.P. Morgan for seven years.

The good news is, Bear advisors don't have to worry about compromising their culture: J.P. Morgan says it plans to keep Bear's private-client group as a standalone entity and to take a hands-off approach. “We're not going to fix what's not broken,” says a J.P. Morgan spokesman. Further, it will keep the Bear name, as well as the private-client group's co-chief executives, Steve Dantus and Barry Sommers, who will report to Morgan's head of Asset Management, Jes Staley.

“Bear's private-client services model has been built up, and is very successful,“ says a J.P. Morgan spokesman. “They are accustomed to owning their clients and running their businesses like it's their own. We appreciate their model, and it will stay the way it is.”

That's huge. Andre Cappon, president of The CBM Group, a management-consulting firm specializing in financial services, says Bear Stearns advisors are older, independent and powerful individuals who are used to doing things their own way. “These are seasoned producers who, at this point in their careers, don't take direction very well,” Cappon says. “If Dimon can give them the same hands-off comfort they are used to, [Bear reps] will probably stay. It will be important for them to know that they won't be Merrill-ized,” he adds, referring to a belief in the industry that Merrill has a highly-structured top-down business environment.

Or, well, J.P Morgan-ized. For one thing, Morgan's advisors are paid on salary and bonus. That doesn't leave a lot of room for the eat-what-you-kill mentality Bear advisors are used to. J.P. Morgan says its bonuses are paid based on how well the firm does overall, how the advisor's division does, how his team performs and, finally, how the advisor performs individually.

Also, J.P. Morgan's advisors operate out of the firm's Asset Management division, which is composed of four segments: institutional, retail, private bank and private-client services. The private bank caters to clients with at least $25 million in assets, while private-client services works with clients who have at least $1 million in assets. The latter is made up of about 900 advisors, mostly from the Bank One merger, and manages about $120 billion in assets. February figures show Bear Stearns' roughly 500 advisors were managing about $75 billion, according to a source familiar with the firm's business.

Still, Dick Bove, analyst with Punk Ziegel & Company, says he doesn't see a big cultural rift developing between Bear advisors and the bank: “The whole idea of culture clash between banks and brokerage firms is ancient history. It has absolutely no relevance today.”

Besides, some Bear advisors are actually looking forward to getting access to the services J.P. Morgan has to offer. “Morgan is one of the larger investment banks in the world,” says one Bear advisor. “It will bring unique opportunities in the private equities, alternative investments, global-asset management, lending capabilities and trust services. There's very little it won't be able to provide.” A Morgan spokesman adds that Bear advisors will eventually get access to the firm's banking services. “We're a huge commercial bank,” he says. “Future offerings can include such things as checking accounts, loans and credits cards.”

It also doesn't hurt that Morgan has a strong balance sheet, notes one Bear branch manager. And then there's the fact that Jamie Dimon is highly regarded. “Dimon is a good business man. We're in an advantageous position so long as we continue to grow and remain profitable,” he says.

For now, Bear advisors say they're simply looking to move on with their day-to-day business. One rep who is still onboard shed a few tears as he told me, “We never in a million years thought that this would happen to our decades-old investment-banking firm. We have this beautiful, new, big building that when you walk into gives you a feeling of strength. It feels like you're working at a strong, powerful firm that's on solid footing. But no, we're not that firm anymore — we were rescued by a competitor.”

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