Table of Contents
Introduction
Bear Stearns was an investment bank involved in brokerage and security trading with its headquarters in New York. The firm failed during the 2008 recession and global financial crisis. It was later sold to JP Morgan. Before collapse, the company traded in capital markets, wealth management, investment banking and global clearing services.
Bear Stearns began as an equity trading house in 1923. It was founded by Harold Mayer, Joseph Bear and Robert Stearns (Ryback 3). Its businesses were private client services, corporate finance, trading and research and mergers and acquisitions among others. Towards its demise, Bear Stearns merged with JP Morgan. This prevented its assets from being sold.
The Gramm Leach Bliley Bill made it possible for Financial Holding Companies to take part in banking, insurance and securities. The law did not provide any direction on the supervision of investment bank holding companies such as Bear Stearns.This lack of supervision may have been brought a weakness in the financial position of Bear Stearns (Ryback, 3).
Bear Stearns’ downfall was preceded by the deepening of the housing crisis. Banks that made investments in subprime mortgages remained with worthless assets. Bear Stearns liquidated its two hedge funds that made investments in volatile securities supported by subprime mortgage loans (Ryback 6). The economy of the US entered recession and the crisis in subprime markets affected credit markets. Bear Stearns involvement in subprime lending contributed to its fall. Bear Stearns ‘two hedge funds failed to bring good returns in 2006 due to problems in the housing market and with the worsening of the market these funds sank. This caused a permanent damage to the reputation of Bear Stearns (Buttler 2014).
Bear Stearns had led in subprime mortgage securitization but in spite of the increasing proof of weaknesses in the market Bear Stearns in 2007 increased its exposure to get a bigger market share. The company risked in a market with falling prices where financial meltdown was looming. The global financial crisis that came later and the recession thereafter made the company to collapse (Burrough 2008).
The main players were lenders such as JP Morgan and Merrill Lynch. There were no criminal or unethical activities, but bad lack caused the scandal to happen and the burden of it fell on Bear Stearns. It was a normal occurrence that can befall any large organization. It happened because investors lacked confidence in it (Buttler 2014).
The company was going to run bankrupt and therefore, government intervention was necessary. The bailout was necessary to avoid a fire sale of Bear Stearns assets worth U.S. $210 billion that if it was allowed to happen could have led to further devaluation of similar securities. The bankruptcy of Bear Stearns could have had negative effects on the economy and a tumultuous unwinding of investments in the market (Ryback 7).
Federal regulators could have honored their initial pledge of providing Bear Stearns with a loan of $25 billion which could have been collaterized by Bear Stearn’s assets. This way, Bear Stearns could have found the 28 day liquidity that it was not getting from the market (Burrough 2008).
Conclusion
Bear Stearns was an investment firm based in New York and it collapsed in 2008 following the global financial crisis. The firm was later bought by JP Morgan following the intervention of the Federal Reserve.
- Burrough, Bryan Bringing Down Bear Stearns. Vanity Fair. 2008.
- Buttler Theodore. What Really Happened to Bear Stearns?.2014.
- Ryback W. (n.d). Case Study on Bear Stearns. World Bank.