Bear Stearns
Encyclopedia
The Bear Stearns Companies, Inc. (former NYSE
ticker symbol
BSC) based in New York City, was a global investment bank and securities
trading and brokerage
, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession. Its main business areas, based on 2006 net revenue distributions, were capital markets (equities, fixed income, investment banking; just under 80%), wealth management
(under 10%), and global clearing
services (12%).
Bear Stearns was involved in securitization
and issued large amounts of asset-backed securities, which in the case of mortgages were pioneered by Lewis Ranieri, "the father of mortgage securities". As investor losses mounted in those markets in 2006 and 2007, the company actually increased its exposure, especially the mortgage-backed assets that were central to the subprime mortgage crisis
. In March 2008, the Federal Reserve Bank of New York
provided an emergency loan to try to avert a sudden collapse of the company. The company could not be saved and was sold to JP Morgan Chase for $10 per share, a price far below its pre-crisis 52-week high of $133.20 per share, but not as low as the $2 per share originally agreed upon by Bear Stearns and JP Morgan Chase.
The collapse of the company was a prelude to the risk management meltdown of the Wall Street investment bank industry in September 2008, and the subsequent global financial crisis and recession. In January 2010, JPMorgan ceased using the Bear Stearns name.
Bear Stearns was founded as an equity trading
house on May Day 1923 by Joseph Bear, Robert Stearns and Harold Mayer with $500,000 in capital. Internal tensions quickly arose among the three founders. The firm survived the Wall Street Crash of 1929
without laying off any employees and by 1933 opened its first branch office in Chicago. In 1955, the firm opened its first international office in Amsterdam
.
In 1985, Bear Stearns became a publicly traded company. It served corporations, institutions, governments and individuals. The company's business included corporate finance, mergers and acquisitions, institutional equities, fixed income sales & risk management, trading and research, private client services, derivatives, foreign exchange and futures sales and trading, asset management and custody services. Through Bear Stearns Securities Corp., it offered global clearing services to broker dealers, prime broker clients and other professional traders, including securities lending. Bear Stearns was also known for one of the most widely read market intelligence pieces on the street, known as the "Early Look at the Market - Bear Stearns Morning View."
Bear Stearns' World Headquarters was located at 383 Madison Avenue
, between East 46th Street and East 47th Street in Manhattan
. The company employed more than 15,500 people worldwide. The firm was headquartered in New York City with offices in Atlanta, Boston
, Chicago, Dallas, Denver, Houston, Los Angeles, Irvine
, San Francisco, St. Louis, Whippany, New Jersey
; and San Juan
in Puerto Rico
. Internationally the firm had offices in London, Beijing, Dublin, Frankfurt
, Hong Kong, Lugano
, Milan
, São Paulo
, Mumbai
, Shanghai, Singapore
and Tokyo.
In 2005-2007, Bear Stearns was recognized as the "Most Admired" securities firm in Fortune
' s "America's Most Admired Companies" survey, and second overall in the security firm section. The annual survey is a prestigious ranking of employee talent, quality of risk management and business innovation. This was the second time in three years that Bear Stearns had achieved this "top" distinction.
On March 17, 2008, JP Morgan Chase offered to acquire Bear Stearns at a price of $2 per share or $236 million. On March 24, 2008, that offer was raised to $10 per share or $1.1 billion in an effort to pacify angry shareholders. JPMorgan Chase completed its acquisition of Bear Stearns on May 30, 2008 at the renegotiated price of $10 per share. The U.S. Federal Reserve rewarded Bear Stearns' shareholders in the deal by taking responsibility for $29 billion in toxic assets in Bear Stearns' portfolio.
As of November 30, 2007, Bear Stearns had notional contract amounts of approximately $13.40 trillion in derivative
financial instruments, of which $1.85 trillion were listed futures and option contracts. In addition, Bear Stearns was carrying more than $28 billion in 'level 3' assets on its books at the end of fiscal 2007 versus a net equity position of only $11.1 billion. This $11.1 billion supported $395 billion in asset
s, which means a leverage ratio of 35.5 to 1. This highly leveraged balance sheet, consisting of many illiquid and potentially worthless assets, led to the rapid diminution of investor and lender confidence, which finally evaporated as Bear was forced to call the New York Federal Reserve to stave off the looming cascade of counterparty
risk which would ensue from forced liquidation.
s (CDOs). Merrill Lynch
seized $850 million worth of the underlying collateral but only was able to auction $100 million of them. The incident sparked concern of contagion as Bear Stearns might be forced to liquidate its CDOs, prompting a mark-down of similar assets in other portfolios. Richard A. Marin
, a senior executive at Bear Stearns Asset Management responsible for the two hedge funds, was replaced on June 29 by Jeffrey B. Lane, a former Vice Chairman of rival investment bank, Lehman Brothers
.
During the week of July 16, 2007, Bear Stearns disclosed that the two subprime hedge funds had lost nearly all of their value amid a rapid decline in the market for subprime mortgages.
On August 1, 2007, investors in the two funds took action against Bear Stearns and its top board and risk management managers and officers. The law firms of Jake Zamansky & Associates and Rich & Intelisano both filed arbitration claims with the National Association of Securities Dealers alleging that Bear Stearns misled investors about its exposure to the funds. This was the first legal action made against Bear Stearns, though there have been several others since then. Co-President Warren Spector was asked to resign on August 5, 2007, as a result of the collapse of two hedge funds tied to subprime mortgages that were managed by Spector. A September 21 report in the New York Times noted that Bear Stearns posted a 61 percent drop in net profits due to their hedge fund losses. With Samuel Molinaro's November 15 revelation that Bear Stearns was writing down a further $1.2 billion in mortgage-related securities and would face its first loss in 83 years, Standard & Poor's
downgraded the company's credit rating
from AA to A.
Matthew Tannin and Ralph R. Cioffi, both former managers of hedge funds at Bear Stearns Companies, were arrested June 19, 2008. They faced criminal charges and were found not guilty of misleading investors about the risks involved in the subprime market. Tannin and Cioffi have also been named in lawsuits brought forth by Barclays Bank, who claims they were one of the many investors misled by the executives.
They were also named in civil lawsuits brought in 2007 by investors, including Barclays Bank PLC, who claimed they had been misled. Barclays claimed that Bear Stearns knew that certain assets in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund were worth much less than their professed values. The suit claimed that Bear Stearns managers devised "a plan to make more money for themselves and further to use the Enhanced Fund as a repository for risky, poor-quality investments." The lawsuit said Bear Stearns told Barclays that the enhanced fund was up almost 6% through June 2007 — when "in reality, the portfolio's asset values were plummeting."
Other investors in the fund included Jeffrey E. Epstein's Financial Trust Company.
worth $2 a share or less than 7 percent of Bear Stearns' market value
just two days before. This sale price represented a staggering loss as its stock had traded at $172 a share as late as January 2007, and $93 a share as late as February 2008. In addition, the Federal Reserve agreed to issue a non-recourse loan of $29 billion to JP Morgan Chase, thereby assuming the risk of Bear Stearns's less liquid assets (see Maiden Lane LLC
). This non-recourse loan means that the loan is collateralized by mortgage debt and that the government can not seize J.P. Morgan Chase's assets if the mortgage debt collateral
becomes insufficient to repay the loan. Chairman of the Fed, Ben Bernanke
, defended the bailout by stating that a Bear Stearns' bankruptcy would have affected the real economy and could have caused a "chaotic unwinding" of investments across the US markets.
On March 20, Securities and Exchange Commission Chairman Christopher Cox said the collapse of Bear Stearns was due to a lack of confidence, not a lack of capital. Cox noted that Bear Stearns's problems escalated when rumors spread about its liquidity crisis which in turn eroded investor confidence in the firm. "Notwithstanding that Bear Stearns continued to have high quality collateral to provide as security for borrowings, market counterparties became less willing to enter into collateralized funding arrangements with Bear Stearns," said Cox. Bear Stearns' liquidity pool started at $18.1 billion on March 10 and then plummeted to $2 billion on March 13. Ultimately market rumors about Bear Stearns' difficulties became self-fulfilling, Cox said.
On March 24, 2008, a class action
lawsuit was filed on behalf of shareholders, challenging the terms of JPMorgan’s recently announced acquisition of Bear Stearns. That same day, a new agreement was reached that raised JPMorgan Chase's offer to $10 a share, up from the initial $2 offer, which meant an offer of $1.2 billion. The revised deal was aimed to quiet upset investors and any subsequent legal action brought against JP Morgan Chase as a result of the deal as well as to prevent employees, many of whose past compensation consisted of Bear Stearns stock, from leaving for other firms. The Bear Stearns bailout was seen as an extreme-case scenario, and continues to raise significant questions about Fed intervention. On April 8, 2008, Paul A. Volcker stated that the Fed has taken 'actions that extend to the very edge of its lawful and implied powers.' See his remarks at a Luncheon of the Economic Club of New York. On May 29, Bear Stearns shareholders approved the sale to JPMorgan Chase at the $10-per-share price.
An article by journalist Matt Taibbi
in Rolling Stone magazine contended that naked short selling
had a role in the demise of both Bear Stearns and Lehman Brothers
. A study by finance researchers at the University of Oklahoma Price College of Business studied trading in financial stocks, including Bear Stearns and Lehman Brothers, and found "no evidence that stock price declines were caused by naked short selling."
groups within Bear Stearns Asset Management, including:
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
ticker symbol
Ticker symbol
A stock symbol or ticker symbol is a short abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market. A stock symbol may consist of letters, numbers or a combination of both. "Ticker symbol" refers to the symbols that were printed on the ticker...
BSC) based in New York City, was a global investment bank and securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
trading and brokerage
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession. Its main business areas, based on 2006 net revenue distributions, were capital markets (equities, fixed income, investment banking; just under 80%), wealth management
Wealth management
Wealth management is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services...
(under 10%), and global clearing
Clearing (finance)
In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction....
services (12%).
Bear Stearns was involved in securitization
Securitization
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...
and issued large amounts of asset-backed securities, which in the case of mortgages were pioneered by Lewis Ranieri, "the father of mortgage securities". As investor losses mounted in those markets in 2006 and 2007, the company actually increased its exposure, especially the mortgage-backed assets that were central to the subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
. In March 2008, the Federal Reserve Bank of New York
Federal Reserve Bank of New York
The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is located at 33 Liberty Street, New York, NY. It is responsible for the Second District of the Federal Reserve System, which encompasses New York state, the 12 northern counties of New Jersey,...
provided an emergency loan to try to avert a sudden collapse of the company. The company could not be saved and was sold to JP Morgan Chase for $10 per share, a price far below its pre-crisis 52-week high of $133.20 per share, but not as low as the $2 per share originally agreed upon by Bear Stearns and JP Morgan Chase.
The collapse of the company was a prelude to the risk management meltdown of the Wall Street investment bank industry in September 2008, and the subsequent global financial crisis and recession. In January 2010, JPMorgan ceased using the Bear Stearns name.
Overview
Equity trading
In finance, equity trading is the buying and selling of company stock shares. Shares in large publicly-traded companies are bought and sold through one of the major stock exchanges, such as the New York Stock Exchange, London Stock Exchange or Tokyo Stock Exchange, which serve as managed auctions...
house on May Day 1923 by Joseph Bear, Robert Stearns and Harold Mayer with $500,000 in capital. Internal tensions quickly arose among the three founders. The firm survived the Wall Street Crash of 1929
Wall Street Crash of 1929
The Wall Street Crash of 1929 , also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout...
without laying off any employees and by 1933 opened its first branch office in Chicago. In 1955, the firm opened its first international office in Amsterdam
Amsterdam
Amsterdam is the largest city and the capital of the Netherlands. The current position of Amsterdam as capital city of the Kingdom of the Netherlands is governed by the constitution of August 24, 1815 and its successors. Amsterdam has a population of 783,364 within city limits, an urban population...
.
In 1985, Bear Stearns became a publicly traded company. It served corporations, institutions, governments and individuals. The company's business included corporate finance, mergers and acquisitions, institutional equities, fixed income sales & risk management, trading and research, private client services, derivatives, foreign exchange and futures sales and trading, asset management and custody services. Through Bear Stearns Securities Corp., it offered global clearing services to broker dealers, prime broker clients and other professional traders, including securities lending. Bear Stearns was also known for one of the most widely read market intelligence pieces on the street, known as the "Early Look at the Market - Bear Stearns Morning View."
Bear Stearns' World Headquarters was located at 383 Madison Avenue
383 Madison Avenue
383 Madison Avenue is an office building in New York City located on Madison Avenue between 46th and 47th Streets and owned by JP Morgan Chase. Designed by David Childs of Skidmore, Owings & Merrill LLP, it is 755 ft tall with 47 floors. It was completed in 2001 and opened in 2002, at...
, between East 46th Street and East 47th Street in Manhattan
Manhattan
Manhattan is the oldest and the most densely populated of the five boroughs of New York City. Located primarily on the island of Manhattan at the mouth of the Hudson River, the boundaries of the borough are identical to those of New York County, an original county of the state of New York...
. The company employed more than 15,500 people worldwide. The firm was headquartered in New York City with offices in Atlanta, Boston
Boston
Boston is the capital of and largest city in Massachusetts, and is one of the oldest cities in the United States. The largest city in New England, Boston is regarded as the unofficial "Capital of New England" for its economic and cultural impact on the entire New England region. The city proper had...
, Chicago, Dallas, Denver, Houston, Los Angeles, Irvine
Irvine, California
Irvine is a suburban incorporated city in Orange County, California, United States. It is a planned city, mainly developed by the Irvine Company since the 1960s. Formally incorporated on December 28, 1971, the city has a population of 212,375 as of the 2010 census. However, the California...
, San Francisco, St. Louis, Whippany, New Jersey
Whippany, New Jersey
Whippany is an unincorporated area located within Hanover Township in Morris County, New Jersey. Whippany's name is derived from the Whippanong Native Americans, a tribe that once inhabited the area...
; and San Juan
San Juan, Puerto Rico
San Juan , officially Municipio de la Ciudad Capital San Juan Bautista , is the capital and most populous municipality in Puerto Rico, an unincorporated territory of the United States. As of the 2010 census, it had a population of 395,326 making it the 46th-largest city under the jurisdiction of...
in Puerto Rico
Puerto Rico
Puerto Rico , officially the Commonwealth of Puerto Rico , is an unincorporated territory of the United States, located in the northeastern Caribbean, east of the Dominican Republic and west of both the United States Virgin Islands and the British Virgin Islands.Puerto Rico comprises an...
. Internationally the firm had offices in London, Beijing, Dublin, Frankfurt
Frankfurt
Frankfurt am Main , commonly known simply as Frankfurt, is the largest city in the German state of Hesse and the fifth-largest city in Germany, with a 2010 population of 688,249. The urban area had an estimated population of 2,300,000 in 2010...
, Hong Kong, Lugano
Lugano
Lugano is a city of inhabitants in the city proper and a total of over 145,000 people in the agglomeration/city region, in the south of Switzerland, in the Italian-speaking canton of Ticino, which borders Italy...
, Milan
Milan
Milan is the second-largest city in Italy and the capital city of the region of Lombardy and of the province of Milan. The city proper has a population of about 1.3 million, while its urban area, roughly coinciding with its administrative province and the bordering Province of Monza and Brianza ,...
, São Paulo
São Paulo
São Paulo is the largest city in Brazil, the largest city in the southern hemisphere and South America, and the world's seventh largest city by population. The metropolis is anchor to the São Paulo metropolitan area, ranked as the second-most populous metropolitan area in the Americas and among...
, Mumbai
Mumbai
Mumbai , formerly known as Bombay in English, is the capital of the Indian state of Maharashtra. It is the most populous city in India, and the fourth most populous city in the world, with a total metropolitan area population of approximately 20.5 million...
, Shanghai, Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
and Tokyo.
In 2005-2007, Bear Stearns was recognized as the "Most Admired" securities firm in Fortune
Fortune (magazine)
Fortune is a global business magazine published by Time Inc. Founded by Henry Luce in 1930, the publishing business, consisting of Time, Life, Fortune, and Sports Illustrated, grew to become Time Warner. In turn, AOL grew as it acquired Time Warner in 2000 when Time Warner was the world's largest...
On March 17, 2008, JP Morgan Chase offered to acquire Bear Stearns at a price of $2 per share or $236 million. On March 24, 2008, that offer was raised to $10 per share or $1.1 billion in an effort to pacify angry shareholders. JPMorgan Chase completed its acquisition of Bear Stearns on May 30, 2008 at the renegotiated price of $10 per share. The U.S. Federal Reserve rewarded Bear Stearns' shareholders in the deal by taking responsibility for $29 billion in toxic assets in Bear Stearns' portfolio.
Financials
As of November 30, 2006, the company had total capital of approximately $66.7 billion and total assets of $350.4 billion. According to the April 2005 issue of Institutional Investor magazine, Bear Stearns was the seventh-largest securities firm in terms of total capital.As of November 30, 2007, Bear Stearns had notional contract amounts of approximately $13.40 trillion in derivative
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
financial instruments, of which $1.85 trillion were listed futures and option contracts. In addition, Bear Stearns was carrying more than $28 billion in 'level 3' assets on its books at the end of fiscal 2007 versus a net equity position of only $11.1 billion. This $11.1 billion supported $395 billion in asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s, which means a leverage ratio of 35.5 to 1. This highly leveraged balance sheet, consisting of many illiquid and potentially worthless assets, led to the rapid diminution of investor and lender confidence, which finally evaporated as Bear was forced to call the New York Federal Reserve to stave off the looming cascade of counterparty
Counterparty
A counterparty is a legal and financial term. It means a party to a contract. A counterparty is usually the entity with whom one negotiates on a given agreement, and the term can refer to either party or both, depending on context....
risk which would ensue from forced liquidation.
Subprime mortgage hedge fund crisis
On June 22, 2007, Bear Stearns pledged a collateralized loan of up to $3.2 billion to "bail out" one of its funds, the Bear Stearns High-Grade Structured Credit Fund, while negotiating with other banks to loan money against collateral to another fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund. Bear Stearns had originally put up just $35 million, so they were hesitant about the bailout, however CEO James Cayne and other senior executives worried about the damage to the company's reputation. The funds were invested in thinly traded collateralized debt obligationCollateralized debt obligation
Collateralized debt obligations are a type of structured asset-backed security with multiple "tranches" that are issued by special purpose entities and collateralized by debt obligations including bonds and loans. Each tranche offers a varying degree of risk and return so as to meet investor demand...
s (CDOs). Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
seized $850 million worth of the underlying collateral but only was able to auction $100 million of them. The incident sparked concern of contagion as Bear Stearns might be forced to liquidate its CDOs, prompting a mark-down of similar assets in other portfolios. Richard A. Marin
Richard Marin (investment banker)
Richard A. Marin was an American investment banker at the former New York investment bank Bear Stearns. He was ousted from his position as the head of asset management twenty-four hours after his blog was publicized. The connection between the two events has not been confirmed.Richard Marin...
, a senior executive at Bear Stearns Asset Management responsible for the two hedge funds, was replaced on June 29 by Jeffrey B. Lane, a former Vice Chairman of rival investment bank, Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
.
During the week of July 16, 2007, Bear Stearns disclosed that the two subprime hedge funds had lost nearly all of their value amid a rapid decline in the market for subprime mortgages.
On August 1, 2007, investors in the two funds took action against Bear Stearns and its top board and risk management managers and officers. The law firms of Jake Zamansky & Associates and Rich & Intelisano both filed arbitration claims with the National Association of Securities Dealers alleging that Bear Stearns misled investors about its exposure to the funds. This was the first legal action made against Bear Stearns, though there have been several others since then. Co-President Warren Spector was asked to resign on August 5, 2007, as a result of the collapse of two hedge funds tied to subprime mortgages that were managed by Spector. A September 21 report in the New York Times noted that Bear Stearns posted a 61 percent drop in net profits due to their hedge fund losses. With Samuel Molinaro's November 15 revelation that Bear Stearns was writing down a further $1.2 billion in mortgage-related securities and would face its first loss in 83 years, Standard & Poor's
Standard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...
downgraded the company's credit rating
Credit rating
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are...
from AA to A.
Matthew Tannin and Ralph R. Cioffi, both former managers of hedge funds at Bear Stearns Companies, were arrested June 19, 2008. They faced criminal charges and were found not guilty of misleading investors about the risks involved in the subprime market. Tannin and Cioffi have also been named in lawsuits brought forth by Barclays Bank, who claims they were one of the many investors misled by the executives.
They were also named in civil lawsuits brought in 2007 by investors, including Barclays Bank PLC, who claimed they had been misled. Barclays claimed that Bear Stearns knew that certain assets in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund were worth much less than their professed values. The suit claimed that Bear Stearns managers devised "a plan to make more money for themselves and further to use the Enhanced Fund as a repository for risky, poor-quality investments." The lawsuit said Bear Stearns told Barclays that the enhanced fund was up almost 6% through June 2007 — when "in reality, the portfolio's asset values were plummeting."
Other investors in the fund included Jeffrey E. Epstein's Financial Trust Company.
Fed bailout and sale to JPMorgan Chase
On March 14, 2008, the Federal Reserve Bank of New York agreed to provide a $25 billion loan to Bear Stearns collateralized by free and clear assets from Bear Stearns in order to provide Bear Stearns the liquidity for up to 28 days that the market was refusing to provide. Apparently the Federal Reserve Bank of New York had a change of heart and told Bear Stearns that the 28 day loan was unavailable to them. The deal was then changed to where the NY FED would make a $30 billion loan to J.P. Morgan (collaterallised not by any J.P. Morgan assets but collaterallised by Bear Stearns Assets), who would buy Bear Stearns for 2 dollars per share. Two days later, on March 16, 2008, Bear Stearns signed a merger agreement with JP Morgan Chase in a stock swapStock swap
A stock swap, also known as a share swap, is a business takeover or acquisition in which the acquiring company uses its own stock to pay for the acquired company. Each shareholder of the newly acquired company receives a certain number of shares of the acquiring company's stock for each share of...
worth $2 a share or less than 7 percent of Bear Stearns' market value
Market value
Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some...
just two days before. This sale price represented a staggering loss as its stock had traded at $172 a share as late as January 2007, and $93 a share as late as February 2008. In addition, the Federal Reserve agreed to issue a non-recourse loan of $29 billion to JP Morgan Chase, thereby assuming the risk of Bear Stearns's less liquid assets (see Maiden Lane LLC
Maiden Lane LLC
Maiden Holdings Ltd., is a Bermuda based holding company with insurance subsidiaries that provides specialty reinsurance products for the global property and casualty market...
). This non-recourse loan means that the loan is collateralized by mortgage debt and that the government can not seize J.P. Morgan Chase's assets if the mortgage debt collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
becomes insufficient to repay the loan. Chairman of the Fed, Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....
, defended the bailout by stating that a Bear Stearns' bankruptcy would have affected the real economy and could have caused a "chaotic unwinding" of investments across the US markets.
On March 20, Securities and Exchange Commission Chairman Christopher Cox said the collapse of Bear Stearns was due to a lack of confidence, not a lack of capital. Cox noted that Bear Stearns's problems escalated when rumors spread about its liquidity crisis which in turn eroded investor confidence in the firm. "Notwithstanding that Bear Stearns continued to have high quality collateral to provide as security for borrowings, market counterparties became less willing to enter into collateralized funding arrangements with Bear Stearns," said Cox. Bear Stearns' liquidity pool started at $18.1 billion on March 10 and then plummeted to $2 billion on March 13. Ultimately market rumors about Bear Stearns' difficulties became self-fulfilling, Cox said.
On March 24, 2008, a class action
Class action
In law, a class action, a class suit, or a representative action is a form of lawsuit in which a large group of people collectively bring a claim to court and/or in which a class of defendants is being sued...
lawsuit was filed on behalf of shareholders, challenging the terms of JPMorgan’s recently announced acquisition of Bear Stearns. That same day, a new agreement was reached that raised JPMorgan Chase's offer to $10 a share, up from the initial $2 offer, which meant an offer of $1.2 billion. The revised deal was aimed to quiet upset investors and any subsequent legal action brought against JP Morgan Chase as a result of the deal as well as to prevent employees, many of whose past compensation consisted of Bear Stearns stock, from leaving for other firms. The Bear Stearns bailout was seen as an extreme-case scenario, and continues to raise significant questions about Fed intervention. On April 8, 2008, Paul A. Volcker stated that the Fed has taken 'actions that extend to the very edge of its lawful and implied powers.' See his remarks at a Luncheon of the Economic Club of New York. On May 29, Bear Stearns shareholders approved the sale to JPMorgan Chase at the $10-per-share price.
An article by journalist Matt Taibbi
Matt Taibbi
Matthew C. "Matt" Taibbi is an American author and journalist reporting on politics, media, finance, and sports for Rolling Stone and Men's Journal, often in a polemical style. He has also edited and written for The eXile, the New York Press, and The Beast.- Early years :Taibbi grew up in the...
in Rolling Stone magazine contended that naked short selling
Naked short selling
Naked short selling, or naked shorting, is the practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. When the seller does not obtain the shares within the required time frame,...
had a role in the demise of both Bear Stearns and Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
. A study by finance researchers at the University of Oklahoma Price College of Business studied trading in financial stocks, including Bear Stearns and Lehman Brothers, and found "no evidence that stock price declines were caused by naked short selling."
Bear Stearns Merchant Banking
As part of the acquisition of Bear Stearns, JPMorgan Chase acquired several private equityPrivate equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
groups within Bear Stearns Asset Management, including:
- Bear Stearns Merchant Banking, a $4.4 billion private equity business founded in 1997. In June 2008, it was announced BSMB would spin out of J.P. Morgan and in November 2008, the firm relaunched as Irving Place CapitalIrving Place CapitalIrving Place Capital, formerly known as Bear Stearns Merchant Banking , is a private equity firm focused on leveraged buyout and growth capital investments in middle-market companies across a range of industries....
. - Bear Growth Capital Partners, a growth capitalGrowth capitalGrowth capital is a type of private equity investment, most often a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business.Companies...
investment group founded in 2003 with a $375 million commitment from Bear Stearns. J.P. Morgan hired CCMP CapitalCCMP CapitalCCMP Capital is a private equity investment firm that focuses on leveraged buyout and growth capital transactions. Formerly known as JP Morgan Partners, the investment professionals of JP Morgan Partners separated from JPMorgan Chase on July 31, 2006. CCMP has invested approximately $12 billion...
to manage the legacy fund - Bear Stearns Private Equity Ltd., renamed J.P. Morgan Private Equity Limited , a publicly traded private equityPublicly traded private equityPublicly traded private equity refers to an investment firm or investment vehicle, which makes investments conforming to one of the various private equity strategies, and is listed on a public stock exchange.There are fundamentally two separate opportunities that private equity firms...
vehicle making fund of fundsFund of fundsA "fund of funds" is an investment strategy of holding a portfolio of other investment funds rather than investing directly in shares, bonds or other securities. This type of investing is often referred to as multi-manager investment...
and secondary investmentsPrivate equity secondary marketIn finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds.... - Bear Stearns Health Innoventures, a venture capital fund established to invest in early- to mid-stage health care focused companies with a focus on the biotechnology sector
- Constellation Ventures a venture capital group, founded in 1998, making investments in the mediaMass mediaMass media refers collectively to all media technologies which are intended to reach a large audience via mass communication. Broadcast media transmit their information electronically and comprise of television, film and radio, movies, CDs, DVDs and some other gadgets like cameras or video consoles...
, communications, software and services sectors
Major shareholders
The largest Bear Stearns shareholders as of December 2007 were:- Barrow Hanley Mewhinney & Strauss - 9.73%
- Joseph C. Lewis - 9.36%
- Morgan StanleyMorgan StanleyMorgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
- 5.37% - James CayneJames CayneJames E. "Jimmy" Cayne is an American businessman, a former CEO of Bear Stearns, founder of TalkGeek.org and world-class bridge player. After losing about one billion dollars in net worth from the collapse of Bear Stearns' stock, he sold his entire stake in the company for $61 million...
- 4.94% - Legg Mason Capital ManagementLegg MasonLegg Mason, Inc. is an American-based global investment management firm with a focus on asset management. The company’s business is divided in two divisions: Americas and International...
- 4.84% - Private Capital Management - 4.49%
- Barclays Global Investors - 3.10%
- State Street 3.01%
- Vanguard Group - 2.67%
- Janus Capital ManagementJanus Capital GroupJanus Capital Group, Inc. is a publicly owned investment firm headquartered in Denver, Colorado. It provides growth and risk-managed investment strategies and manages equity, fixed income, money market, as well as balanced mutual funds....
- 2.34% - Legg Mason Funds ManagementLegg MasonLegg Mason, Inc. is an American-based global investment management firm with a focus on asset management. The company’s business is divided in two divisions: Americas and International...
- 1.95% - Fidelity Management- 1.93%
- Putnam Investment Management - 1.45%
- Neuberger Berman - 1.55%
- UBSUBS AGUBS AG is a Swiss global financial services company headquartered in Basel and Zürich, Switzerland, which provides investment banking, asset management, and wealth management services for private, corporate, and institutional clients worldwide, as well as retail clients in Switzerland...
- 1.54% - Celal Aglamaz - 0.85%
Managing Partners / Chief Executive Officers
- Salim L. LewisSalim L. LewisSalim L. "Cy" Lewis was the Managing Partner of Bear, Stearns & Company, running the company from 1949 until shortly before his death in 1978.-Early life:...
1949 - 1978 - Alan GreenbergAlan GreenbergAlan C. "Ace" Greenberg is a former Chairman of the Executive Committee of The Bear Stearns Companies, Inc.He began work at Bear Stearns in 1949 as a clerk. He served as Chairman of the Board of Bear Stearns from 1985 to 2001, and as its CEO from 1978 to 1993. Greenberg serves also as a...
1978 - 1993 - James CayneJames CayneJames E. "Jimmy" Cayne is an American businessman, a former CEO of Bear Stearns, founder of TalkGeek.org and world-class bridge player. After losing about one billion dollars in net worth from the collapse of Bear Stearns' stock, he sold his entire stake in the company for $61 million...
1993 - 2008 - Alan SchwartzAlan SchwartzAlan D. Schwartz is an executive chairman of Guggenheim Partners, LLC, an investment banking firm based in Chicago and New York. He was the last CEO Bear Stearns before its acquisition by JPMorgan Chase & Co., having succeeded James E. Cayne who remained chairman.-History at Bear Stearns:Alan...
2008
See also
- Primary dealersPrimary dealersPrimary dealer is a formal designation of a firm as a market maker of government securities. Primary dealer systems are present in many countries including Canada, France, Italy, Spain, the United Kingdom, and the United States...
- Bankruptcy of Lehman BrothersBankruptcy of Lehman BrothersLehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The bankruptcy of Lehman Brothers remains the largest bankruptcy filing in U.S...
- Lehman BrothersLehman BrothersLehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
- Bear Stearns Merchant Banking
- House of Cards: A Tale of Hubris and Wretched Excess on Wall StreetHouse of Cards (novel)House of Cards: A Tale of Hubris and Wretched Excess on Wall Street is a 2009 book written by William D. Cohan. It chronicles the history of Bear Stearns, from its founding in 1923 to its fire sale to JP Morgan in 2008, following the subprime mortgage crisis...
Further reading
- William Cohan (2010). House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.