Bear Stearns
What Was Bear Stearns?
Bear Stearns was a global investment bank situated in New York City that collapsed during the 2008 financial crisis. The bank was intensely presented to mortgage-backed securities that transformed into toxic assets when the underlying loans started to default. Bear Stears was at last sold to JPMorgan Chase for a portion of its pre-crisis value.
Figuring out Bear Stearns
The Bear Strearns company was founded in 1923 and endure the Stock Market Crash of 1929, turning into a global investment bank with branches around the world. Skilled management and risk-taking saw Bear Stearns keep on developing with the global economy. It was one of the many firms to embrace Lewis Ranieri's securitization of debt to make new financial products.
By the mid 2000s, Bear Stearns was among the world's biggest investment banks and a highly regarded member of Wall Street's pantheon of investment banks. Notwithstanding making due and afterward flourishing after the Great Depression, Bear Stearns was a player in the mortgage meltdown and Great Recession that followed.
Bear Stearns worked a great many financial services. Inside this mix were hedge funds that utilized enhanced leverage to profit from collateralized debt obligations (CDOs) and other securitized debt markets. In April 2007, everything went south for the housing market, and the investment bank immediately started to understand that the actual risk of these hedge fund strategies was a lot bigger than initially accepted.
The collapse of the housing market got the whole financial system by surprise, as a large part of the system depended on a foundation of a strong housing market supporting a strong derivatives market. The Bear Stearns funds utilized procedures to additional jack up the leverage to these alleged market fundamentals, just to figure out that the downside risk on the instruments they were dealing with wasn't restricted in this extreme case of market collapse.
The Bear Stearns Hedge Fund Collapse
The hedge funds utilizing these strategies posted huge losses that required them to be rescued inside, costing the company several billion forthright and afterward extra billion-dollar losses in writedowns over time. This was terrible information for Bear Stearns, yet the company had a market cap of $20 billion, so the losses were viewed as sad however reasonable.
This strife saw the first quarterly loss in quite a while for Bear Stearns. Rapidly, the ratings firms heaped on and kept on downgrading Bear Stearns' mortgage-backed securities and different holdings. This left the firm with illiquid assets in a down market. The company ran out of funds and, in March 2008, went to the Federal Reserve for a credit guarantee through the Term Securities Lending Facility. Another downgrade hit the firm and a bank run began. By March 13, Bear Stearns was penniless. Its stock dove.
JPMorgan Chase Buys Bear Stearns' Assets
With deficient liquidity to open its entryways, Bear Stearns moved toward the Federal Reserve Bank of New York for a cash loan of $25 billion. At the point when that was denied, JPMorgan Chase agreed to buy Bear Stearns for $2 a share, with the Federal Reserve guaranteeing $30 billion in mortgage-backed securities. The last price was eventually raised to $10 a share, still a sharp drop for a company that had traded at $170 a year sooner.
Jamie Dimon, the CEO of JPMorgan Chase, would later regret the decision, saying it cost the company several billion to close out the faltering trades and settle litigation against Bear Stearns. "Under normal conditions, the price we eventually paid for Bear Stearns would be thought of by most to be low," he wrote in his 2008 letter to shareholders. The explanation Bear Stearns was sold off so efficiently is that, at that point, nobody realized which banks held toxic assets or how big of a hole these apparently harmless synthetic products could thump in a balance sheet. "We were not buying a house — we were buying a house on fire."
JPMorgan would proceed to get another investment bank, Washington Mutual, not long after. The two acquisitions would eventually cost a combined $19 billion in fines and settlements.
Significant
JPMorgan's acquisition of Bear Stearns was just potential because of a $30 billion guarantee from the Federal Reserve. This bailout brought up major issues about the job of the goverment in a free-market economy.
Lehman Brothers' Collapse
The illiquidity that Bear Stearns looked due to its exposure to securitized debt uncovered inconveniences at other investment banks, also. A significant number of the biggest banks were vigorously presented to this kind of investment, including Lehman Brothers, a major lender of subprime mortgages.
By 2007, Lehman Brothers had a mortgage portfolio worth $85 billion, or four times its shareholder equity. It was likewise vigorously leveraged, implying that a generally minor downturn could clear out the value of its portfolio. On March 17, 2008, just after the Bear Stearns bailout, the value of Lehman stock fell 48%.
Until the end of the year, Lehman Brothers endeavored to unwind its situations by selling stock and decreasing leverage. In any case, investor confidence kept on draining out. After a failed takeover by Barclays and Bank of America, Lehman Brothers declared bankruptcy.
Bear Stearns FAQs
What Happened to Bear Stearns' Investors After the Collapse?
As part of the stock-trade deal with JPMorgan, Bear Stearns investors received about $10 of JPMorgan stock in exchange for each share they owned from Bear Stearns. This was a sharp discount from the last share price of $30. Had those investors kept those shares, they would have recovered their losses eleven years after the fact, as indicated by the Wall Street Journal.
Which Role Did Deregulation Play in the Bear Stearns' Collapse?
A few financial analysts have credited the subprime mortgage crisis to financial deregulation, particularly the 1999 cancelation of parts of the Glass-Steagall Act. This nullification eliminated the legal barriers among commercial and investment banking, allowing banks like Bear Stearns to issue and endorse securities. These securities would at last turn into a major catalyst for the financial collapse.
Who Benefited From the Bear Stearns' Collapse?
While there are no reasonable victors from the Bear Stearns collapse, stockholders would have endured seemingly greater losses had the bank failed. JPMorgan Chase, which acquired Bear Stearns at fire-sale prices, would likewise benefit, in spite of the fact that it would be some time before JPMorgan would break even.
Who Went to Jail for the 2008 Financial Crisis?
Albeit the 2008 financial crisis caused a public outcry, there was no retribution for the bankers who were faulted for the crisis. Two managers at Bear Stearns hedge funds were captured for deluding investors, however they were found not blameworthy. The main fruitful indictment was of Kareem Serageldin, a Credit Suisse executive who was sentenced for mismarking bond prices to conceal the bank's losses.
The Bottom Line
Previously one of the biggest investment banks on Wall Street, the collapse of Bear Stearns is currently viewed as a wake up call against corporate greed and the impulses of the free market. In the housing bubble of the mid 2000s, Bear Stearns inclined vigorously into mortgage-backed securities, tremendously underrating the risks of the subprime housing market. While the housing market collapsed and borrowers started to default, the value of those securities dove.
At last, Bear Stearns was acquired by JPMorgan in a fire sale. Since the purchase was upheld by the Federal Reserve, the acquisition brought up ethical issues about corporate bailouts and the public authority's job in a market economy.
Highlights
- By 2008 the firm's leader hedge funds were over-presented to mortgage-backed securities and other toxic assets, which had been purchased with a high degree of leverage.
- Bear Stearns was a New York City-based global investment bank and financial company that was founded in 1923. It collapsed during the 2008 financial crisis.
- The collapse of Bear Stearns encouraged a more extensive collapse in the investment banking industry, which additionally brought down major players like Lehman Brothers.
- The company was at last sold to JPMorgan Chase for $10 a share, well below its value before the crisis.
- Prior to the financial collapse, Bear Stearns was the fifth-biggest investment bank, with $18 billion in assets.
