Yesterday's Wall Street Journal's Money & Investing section featured Alan Schwartz and Bear Stearns in the article "Can New CEO Repair Bear?"
Coincidentally, I heard parts of Schwartz' interview on CNBC that morning, as well. In the interview, Schwartz was careful to avoid saying anything negative whatsoever about his longtime employer. The recent mortgage excesses are 'old news.' They are, according to the new CEO, well-balanced and focused on sustained growth businesses.
To hear Schwartz describe Bear Stearns, you'd think his ascendancy to the CEO position at Bear is business as usual.
However, the Journal asks,
"How would Mr. Schwartz turn around a company, which is now trading at a level below its stockholders' equity?"
How indeed? In a market already roiled by mortgage woes, partially of Bear's own making. Fueled by its chairman, Jim Cayne's, intemperate, self-serving comments last summer that it was the 'worst fixed-income market (he'd) ever seen,' or words to that effect.
Schwartz' initial comments on his plan to revive Bear, as reported in the Journal piece, include,
"exiting from unwanted positions in leverage loans and in mortgages; find new ways to make profits in the changing fixed-income business; and nurture Bear's healthier business units, like its growing international operations and energy unit."
Oh boy. Not one of these avenues out of Bear's mess involves unique strengths or any sort of competitive advantage for the ailing firm.
As I considered the article, the interview, and this post, it occurred to me to ask a simple question about the major, publicly-held US investment banks:
"What, if any, is the key source of competitive advantage for each one?"
What I came up with, off the top of my head, is:
Goldman Sachs: risk management and focused trading expertise
Merrill Lynch: ostensibly broad, valued retail distribution
Morgan Stanley: perhaps a one-time strength in old-line industrial investment banking contacts
Lehman: focused fixed income trading businesses
Bear Stearns: entrepreneurial zeal and nimbleness borne of small size
Given that Bear took mortal body blows to its capital and reputation in 2007, I think it no longer has a competitive advantage. Its prior strength has become its Achilles heel.
Too bad for Alan Schwartz. He seems to be a very competent M&A guy who has been handed an atrociously bad hand in a long-running card game, but without many chips.
Between the currently volatile financial markets, Bear's competitors, and its own badly damaged reputation, involving the two mutual funds from which Cayne tried to absolve any responsibility last year, I'd be disinclined to believe that Bear Stearns has any significant chance of earning consistently superior total returns for its shareholders for years.
It may get a temporary pop in its stock price at some point, if it simply survives for a while. But I don't see a long term basis for its ability to ever justify investment in it for total return performance.
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