Published: August 08, 2008
Bear Stearns Got Caught Holding The Bag Full of Potatoes
By Joel Block
Do you remember the game that we used to play when we were kids? We'd sit in a circle and then we would take a potato and pass it from one kid to the next kid in a circle until the music stopped or until somebody said stop. The person holding the potato was out of the game.
Business, unfortunately, works a lot the same way. But many people don't think about it like they used to think about it when they were kids because the rules are so much more complicated.
In this economy, where the mortgage debacle is taking down some of the biggest financial institutions that exist in the country, it's all related to the concept of the hot potato.
When banks make mortgages to consumers, they accumulate the paper that secures the mortgage money that's been loaned. They package it up and sell it to larger organizations, who in turn accumulate a portfolio for many financial institutions into giant bundles. And those bundles are sold to other investors. Those investors either hold the paper or sell the paper to someone else. The paper keeps moving around and around in circles amongst giant investor groups. When the music stops, and loans start going bad, some investor is going to get stuck holding the bag full of potatoes.
Bear Stearns got caught holding the bag full of potatoes. They were lucky because the government allowed for special debt arrangements to be provided, and that allowed Chase to purchase that bag of potatoes from them. This allowed Bear Stearns to continue, albeit at a significantly discounted rate since their stock plummeted over 90% in just a few moments.
Pay attention to the various investment vehicles that are in the marketplace because you want to be very careful, as you are moving through the game, that you don't get stuck holding the bag of potatoes. Ask yourself this question..."If I'm getting involved in a game of hot potato, is the music about to stop when I first come into the game?"
So, as you are working hard every day to build your company, or as you're building your career, be on the look out for opportunities that will have staying power. Don't get involved at the tail end. Always be aware that somebody's going to get stuck holding the bag. And be very careful, before you get involved in a deal, that you've evaluated it early so that you don't end up being the kid who gets kicked out of the game because you ended up with the bag of potatoes.
About Joel G. Block
Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenue and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker and advisor. To bring Joel into your company, please visit www.joelblock.com or www.growth-logic.com.
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