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Bear Stearns

What is Bear Stearns?

Bear Stearns was a New York City-based global investment bank that collapsed during the 2008 financial crisis. When the underlying loans began to default, the bank was heavily exposed to mortgage-backed securities, which turned into toxic assets. Bear Stearns was eventually sold to JPMorgan for a fraction of its pre-crisis value.

key takeaways

  • Bear Stearns is a New York City-based global investment banking and financial firm founded in 1923. It collapsed during the 2008 financial crisis.
  • Before the financial meltdown, Bear Stearns was the fifth-largest investment bank with $18 billion in assets.
  • By 2008, the firm’s flagship hedge fund was overexposed to mortgage-backed securities and other toxic assets, which were bought with high leverage.
  • The company eventually sold to JPMorgan for $10 a share, well below its pre-crisis value.
  • The collapse of Bear Stearns triggered a broader collapse in investment banking that also brought down major players such as Lehman Brothers.

Get to know Bear Stearns

Bear Strearns was founded in 1923 and survived the stock market crash of 1929 to become a global investment bank with offices around the world. Competent management and risk-taking have enabled Bear Stearns to continue to grow with the development of the global economy. It is one of many companies that have accepted Lewis Ranieri’s debt securitization to create new financial products.

By the early 2000s, Bear Stearns was among the world’s largest investment banks and a respected member of the Wall Street investment banking pantheon. Despite surviving and thriving after the Great Depression, Bear Stearns was a participant in the mortgage collapse and the Great Depression that followed.

Bear Stearns operates a wide range of financial services. In this combination, hedge funds use enhanced leverage to profit from the market for collateralized debt obligations (CDOs) and other securitized debt. In April 2007, the housing market bottomed out, and investment banks soon began to realize that the actual risks of these hedge fund strategies were far greater than originally thought.

The collapse of the housing market took the entire financial system by surprise, as much of the system was built on a solid housing market that underpins a solid derivatives market. Bear Stearns funds have used technology to further leverage on these so-called market fundamentals, only to find that the downside risk of the instruments they deal with is not limited in this extreme market crash scenario.

Bear Stearns Hedge Fund Crash

Hedge funds using these strategies posted massive losses and needed an internal bailout, costing companies billions of dollars in upfront costs and then billions of additional dollars in write-downs throughout the year. That’s bad news for Bear Stearns, but the company’s market cap is $20 billion, so losses are considered unfortunate but manageable.

The turmoil led to Bear Stearns’ first quarterly loss in 80 years. Soon, rating firms added and continued to downgrade Bear Stearns’ mortgage-backed securities and other assets. That leaves the company with illiquid assets in a down market. The company ran out of funds and in March 2008 sought credit guarantees from the Federal Reserve through the Term Securities Lending Facility. Another downgrade hit the company, and a bank run began. By March 13, Bear Stearns went bankrupt. Its stock plummeted.

JPMorgan Chase acquires Bear Stearns assets

Unable to open the doors due to lack of liquidity, Bear Stearns sought a $25 billion cash loan from the Federal Reserve Bank of New York.When this was rejected, JPMorgan agree Buying Bear Stearns for $2 per share, the Fed guarantees $30 billion in mortgage-backed securities. The final price eventually increased to $10 a share, still a steep drop for a company that was trading at $170 a year ago.

JPMorgan Chase CEO Jamie Dimon will later Regret The decision said the company spent billions of dollars to close failed deals and settle lawsuits against Bear Stearns. “Under normal circumstances, the price we end up paying for Bear Stearns would be considered low,” he wrote in a 2008 letter to shareholders. The reason Bear Stearns was sold so cheaply was that at the time no one knew which banks held toxic assets or how much of a hole these seemingly innocuous synthetic products would create on balance sheets. “We’re not buying a house – we’re buying a house that’s on fire.”

Soon after, JPMorgan will go ahead with its acquisition of Washington Mutual, another investment bank. The two acquisitions will ultimately cost a combined $19 billion in fines and settlements.

important

JPMorgan’s takeover of Bear Stearns was possible thanks to a $30 billion guarantee from the Federal Reserve. The bailout raises major questions about the role of government in a free-market economy.

Lehman Brothers collapses

The illiquidity Bear Stearns faced with securitized debt exposure also exposed troubles at other investment banks. Many of the largest banks have been badly affected by such investments, including Lehman Brothers, a major lender of subprime mortgages.

By 2007, Lehman Brothers’ mortgage portfolio was worth $85 billion, four times its shareholders’ equity. It’s also highly leveraged, meaning a relatively minor recession could wipe out the value of its portfolio. On March 17, 2008, just after the Bear Stearns bailout, Lehman Brothers’ stock fell 48% in value.

For the rest of the year, Lehman Brothers attempted to unwind its positions by selling shares and reducing leverage. However, investor confidence continued to erode. Lehman Brothers declared bankruptcy following failed takeovers by Barclays and Bank of America.

Bear Stearns FAQ

What happened to Bear Stearns investors after the crash?

Bear Stearns investors received about $10 in JPMorgan shares for every share they received from Bear Stearns as part of a stock swap deal with JPMorgan. This is a substantial discount to the final share price of $30. If these investors hold these stocks, they will make up their losses after 11 years. Wall Street Journal.

What role did deregulation play in Bear Stearns’ collapse?

Some economists attribute the subprime crisis to financial deregulation, particularly the repeal of part of the Glass-Steagall Act in 1999. The repeal removed legal barriers between commercial and investment banks, allowing banks such as Bear Stearns to issue and underwrite securities. These securities will eventually be the main catalyst for financial collapse.

Who benefited from Bear Stearns’ collapse?

While there is no clear winner from a Bear Stearns collapse, shareholders could suffer even more if the bank fails. JPMorgan Chase, which bought Bear Stearns at a low price, would also benefit, although it will take a while for JPMorgan to break even.

Who was jailed for the 2008 financial crisis?

Despite the public outcry caused by the 2008 financial crisis, the bankers who were blamed for the crisis had little thought.Two Bear Stearns hedge fund managers arrested for misleading investors, but they are found innocent. The only successful prosecution was against Credit Suisse executive Kareem Serageldin. convicted Mislabeling bond prices to cover losses for banks.

bottom line

The collapse of Bear Stearns, once one of Wall Street’s biggest investment banks, is now seen as a cautionary tale against corporate greed and the whims of the free market. During the housing bubble of the early 2000s, Bear Stearns relied heavily on mortgage-backed securities and greatly underestimated the risks in the subprime housing market. When the housing market collapsed and borrowers began to default, the value of these securities plummeted.

In the end, Bear Stearns was acquired by JPMorgan Chase at a low price. Because the acquisition was backed by the Federal Reserve, the acquisition raised ethical questions about corporate bailouts and the role of the government in a market economy.

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