Shareholders in Bear Stearns have been all but wiped out despite the rescue bid from the Federal Reserve and JP Morgan Chase, prompting comparisons to the collapse of Enron. CNBC has been airing videos of old interviews with former Enron CEO Ken Lay, which fell apart almost seven years ago destroying a great deal of shareholder value. Far more shareholder value, in fact, than at Bear Stearns.
Those comparisons are apt, Tom Kirkendall points out, but not for the reasons many would suspect. There’s a tendency among some—especially plaintiff lawyers and some in the media—to suspect criminal wrong-doing when a company collapses. How could so much value be destroyed without serious wrong-doing? But these suspicions are often wrong-headed, and may even be counter-productive if they encourage shareholders and regulators to concentrate on investigations or misguided regulations.
Kirkendall says that the risk of collapse from a loss of investor and customer confidence is inherent in the kind of businesses that both Enron and Bear Stearns ran.
The fact of the matter is that Enron was -- and Bear Stearns and AIG are -- trust-based businesses that fundamentally depend on the trust of the markets to sustain their value. Once that trust is lost, such companies lose value quickly and dramatically (a case in point -- JP Morgan Chase's proposed $236 million purchase price for Bear Stearns comes just hours after Bear's market cap was $3.5 billion this past Friday and $20 billion as of January, 2007) Although unfortunate for the owners of such companies, such a dramatic loss of wealth does not necessarily mean that any criminal conduct caused or was even involved in the loss. Rather, such loss is simply one of the risks of investing in a company based on a trust-based business model. The sooner we all recognize and understand this risk -- and avoid the mainstream media's promotion of myths about them -- the quicker we can put a stop to injustices such as this while advancing the discussion of how best to hedge the risk of such potential losses.