>> Crash Chronicle : The Fall of Bear Stearns

Recap of Bear Stearns' history and the crisis it faced

Bear Stearns, founded in 1923, had been an aggressive player in the financial markets for many years. One of the pioneers of mortgage-backed securities in the 1980s, Bear was heavily involved in the packaging of sub-prime mortgages during the housing boom. As the prices of these securities slipped in 2007, Bear bought not only for its own account but also for its hedge funds that it established for its wealthy investors. Bear's purchases were financed with short-term borrowings that were collateralized against these securities. But as the market continued to tumble, lenders demanded more cash to secure their loans. When Bear knew it would not have enough cash to cover the margin, it went to JPMorgan, one of its lenders. Both then turned to the Fed to arrange a $30 billion dollar loan guarantee against Bear's assets to prevent the firm from going bankrupt.

From $172 a share to an almost a 98.4% wipeout for investors
Bear sold for $172 a share at the end of 2007, once valuing the firm at over $20 billion. The Fed agreed-on price on March 16 '08 was $2, about $250 million, which represents a 98.4% wipeout for investors. The higher price agreed to a week later ($10/share) actually reduced the Fed's exposure to Bear's troubled assets.

Lets take a peek at Bear Stearns chart:


Where does the blame lie for Bear Stearns collapse?
William D. Cohan’s new book, House of Cards, provides a gripping narrative of the company’s downfall, largely in the protagonists’ own words, which has the side benefit of making vivid the vain, combative, materialistic, and male-dominated culture of the firm.

The behind-the-scenes actions of long time Bear CEO Jimmy Cayne, as well the the replacement CEO Alan Schwartz, only two months after replacing Cayne as CEO was missing in action at an annual Bear Stearns media conference in Palm Beach, Fla., during the March panic that would force the company into JPMorgan’s grasp days later.

You can read a few interesting excerpts from the book here

How is the Bear Stearns purchase working out for JP Morgan?
At the time the deal was announced, the banks said it expected Bear to generate roughly $1 billion in after-tax earnings over the next 12 to 18 months.

It's uncertain if Chase will be able to live up to that promise considering that Bear Stearns' appetite for risky assets trailed only that of Lehman Brothers and Merrill Lynch.

But most analysts agree that if the Bear deal were going to lead to massive writedowns for Chase, as was the case with Bank of America after its 11th-hour purchase of Merrill Lynch last September, it would have happened already.

Continue reading more here

Related articles / Credits :

• Jeremy Siegel's article from which I borrowed about Bear's history and wipeout, here
  
• JP Morgan one year after Bear Stearns
• Bear Stearns chart courtesy TheStreet.com