March 28, 2008

Cornell Reacts to Bear Stearns Downfall

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On the evening of March. 16, Bear Stearns announced that it would sell itself to J.P. Morgan at a fire-sale price of $2 per share. Most Cornell students at that time were already at home and looking forward to spring break, but for the select few who accepted offers from Bear Stearns, it was a time filled with trepidation and uncertainty, with some even starting to look for new jobs.
“Several students have come [to Career Services] to understand how to navigate the waters during a time of uncertainty like this. I know there is at least one student from the hotel school, one student from ILR, and one student from CALS who have offers [from Bear] and have come in for advice,” said Rebecca Sparrow, director of Career Services.
One student affected by the situation is Rohit Kar ’10, who was expecting to work for Bear this summer.
“I was expecting a deal involving Bear, but the actual terms of the deal nevertheless came as a shock. My summer plans are now uncertain, but I’m hopeful that when the dust settles, the sides involved will work something out for interns and new ­hires,” said Kar.
However, students directly affected by Bear’s collapse should not be the only ones concerned, as Bear’s troubles may have broader implications for the entire job market and the chances of securing summer and fulltime job offers. Since there is generally a lag between the start of an economic downturn and decreases in hiring, we have just begun to feel the effects of a tightening.
“Offers are being and will continue to be rescinded. Bear is not alone. Citigroup just announced they are cutting 2,000 jobs. There are layoffs across the board and they will continue to happen. Bear is only the most obvious example and I would not be surprised if other firms start rescinding offers,” said Prof. Charles Chang, finance.
Bear’s problems began in earnest on March 10, when rumors spread that it was facing a capital crunch and had significant liquidity issues. Whether this was in fact true soon became irrelevant, as investor sentiment quickly made it a self-fulfilling prophecy. By midweek, the firm’s investors and clients were leaving the firm in droves and many of its trading partners had ceased trading for fear of counterparty risk — that Bear would be unable to make good on its financial obligations. Events continued to unfold against Bear and by the end of the week, the firm faced the imminent prospect of bankruptcy.
Bear and J.P. Morgan bankers then worked through the weekend with prodding from the Treasury and the Federal Reserve to negotiate a deal by Sunday night, before financial markets opened in Asia, to ensure continued investor confidence in America’s financial system. As Bear employees returned to work on March 17 after digesting the news for less than 24 hours, everyone was in shock and disbelief at the rapid turn of events.
“I was at Bear from 9 a.m. to 4 p.m. [on Monday]. No one even knew what to do. A lot of people were talking to family members. People were saying, ‘Hey, do you still have a job?’ They did not even know – the private wealth department I shadowed has been consistently profitable, but it does not matter, because J.P. Morgan has something similar to them,” said Jeff Roshko ’11, who externed at Bear over spring break.
At one point, the deal was in jeopardy as angry shareholders of Bear threatened to vote down the deal for severely undervaluing their firm. However, this prospect has been reduced as J.P. Morgan quintupled its bid to $10 per share. This new development has real consequences for Bear’s hires, for several sources have revealed that J.P. Morgan will honor Bear’s offers should the deal be completed. However, there has been no confirmation from J.P. Morgan. If it does honor the offers, the question still remains whether there will be work to go around – whether Bear hires will have jobs, but sit around doing nothing.
“There are only so many sources of value from merging and one of them is reducing redundancies. Your new boss has hired an army of analysts and interns for themselves. Where do you fit in? You were not their hire. You were not necessarily somebody they wanted in the first place. It is not a strike against you,” said Chang. “What happens to the people who sit around and do nothing? For the first year analysts who are sitting around learning nothing, how do you compete with the people who have been taught the steep learning curve [at other firms]?”
With all the recent events, some are questioning the popular desire to go into investment banking.
“What we saw was that a lot of the brightest Cornell students have their hearts set on becoming investment bankers on Wall Street for the last decade or so. It might be a good time to rethink that career path, think about other options,” said Prof. Robert Frank, management, and New York Times economic columnist.
Students looking to go into finance might be faced with difficult decisions. As where there used to be choices for positions, there will now be many less. This will be a boon for smaller firms that, especially in the past few years, have had to compete on campus with larger, better-known Wall Street banks, Chang speculated. Now, with banks reducing hiring, smaller firms will be able to replace this demand.
“We did get a call on Wednesday from an employer who still has openings and wanted to reach out to us to. This kind of thing happens, especially when there is news like Bear,” said Sparrow. “However, campus recruiting is not really a great method for filling positions for small firms – it is very, very expensive for the firms and unless they are making a lot of hires, it is not the most efficient way to use their resources. We may well see a greater variety of employers using our resume drop feature online.”
Bear’s demise and general economic weakness might also negatively affect alumni donations as lower salaries and lost jobs will decrease people’s disposable incomes and their propensity for charity.
“A lot of the people who donate money to Cornell are from the financial industry. We have a very large alumni base in New York City. I know, personally, some people in that community have taken a huge financial hit in recent months, so it could very easily affect donations in the short term,” said Frank.
“When wealth is hurt, it is going to hurt everything. Absolutely, when your firm is not doing as well, you do not pony up a lot of cash and give it to your alma mater. It is probably not an opportune time to go out looking for more money,” added Chang.
Public funding from the New York State government for Cornell could also potentially be tightened in the next several years, as the financial services industry is a large source of tax revenue for the state and continued weakness in financial earnings could cause a net decrease in this revenue.
“New York’s tax revenue comes disproportionately from the financial industry, so this will be a time of budget tightening for New York City. The 2007 tax year is closed, but I am guessing the amount of money financial firms will make in years coming will be significantly lower, so the city will not be able to look forward to the same amount of tax income,” Frank said.
However, in these difficult markets, Cornell has done relatively well protecting the funds it already has — namely its endowment. Through the money managers that the Investment Office hires to manage and invest the endowment, Cornell has largely sidestepped the turmoil plaguing financial companies, particularly Bear’s precipitous drop.
“We were not impacted from an operational side by the Bear Stearns’s problem. We kept in pretty close contact with our managers over that time [of volatility], and were impressed with how they handled it,” said James Walsh, Cornell’s chief investment officer. “On [our exposure to] financials in general, we know that our managers came into the year underweight financials, so we will have benefited.”
Another bright spot for Cornell is a new source of applicants. For many during economic downturns, one of the best options is to go back to school. Cornell, with its sizable graduate offerings, is well positioned to take advantage of this trend and will likely see an increase in high quality candidates next year.
“Someone who would not have been attracted to coming back to school for graduate studies maybe now is, or maybe now considers a career switch they have never considered before. This is certainly what happened back in 2000 to 2002,” Chang said.