Bear Stearns
NYSE: BSC | |
Industry | Investment services |
---|---|
Founded | May 1, 1923 |
Defunct | March 16, 2008[1] |
Fate | Acquired by JPMorgan Chase |
Successor | JPMorgan Chase |
Headquarters | New York City, New York, U.S. |
Key people | Alan Schwartz, former CEO James Cayne, former chairman & CEO David Robert Malpass, chief economist for the last six years before its failure |
Products | Financial services Investment banking Investment management |
Website | bear.com |
The Bear Stearns Companies, Inc. was an American
In the years leading up to the failure, Bear Stearns was heavily involved in securitization and issued large amounts of asset-backed securities which were, in the case of mortgages, pioneered by Lewis Ranieri, "the father of mortgage securities."[2] As investor losses mounted in those markets in 2006 and 2007, the company actually increased its exposure, especially to 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, however, and was sold to JPMorgan Chase for $10 per share,[3] 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.[4]
The collapse of the company was a prelude to the meltdown of the investment banking industry in the United States and elsewhere that culminated in September 2008, and the subsequent
History
Bear Stearns was founded as an
In 1985, Bear Stearns became a publicly traded company.[6] 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.[7]
Bear Stearns' World Headquarters was located at 383 Madison Avenue, between East 46th Street and East 47th Street in Manhattan. By 2007, the company employed more than 15,500 people worldwide.[8] 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, 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 securities firm section.[9] 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.
Lead-up to the failure – increasing exposure to subprime mortgages
By November 2006, the company had total capital of approximately $66.7 billion and total assets of $350.4 billion and according to the April 2005 issue of Institutional Investor magazine, Bear Stearns was the seventh-largest securities firm in terms of total capital.
A year later Bear Stearns had
Start of the crisis – two subprime mortgage funds fail
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 $25 million, so they were hesitant about the bailout; nonetheless, CEO James Cayne and other senior executives worried about the damage to the company's reputation.
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
Matthew Tannin and Ralph R. Cioffi, both former managers of hedge funds at Bear Stearns, were arrested June 19, 2008.
They were also named in civil lawsuits brought in 2007 by investors, including Barclays, who claimed they had been misled. Barclays claimed that Bear Stearns knew that certain assets in the Bear Stearns
Other investors in the fund included
Fed bailout and sale to JPMorgan Chase
On March 14, 2008, the Federal Reserve Bank of New York ("FRBNY") agreed to provide a $25 billion loan to Bear Stearns collateralized by unencumbered assets from Bear Stearns in order to provide Bear Stearns the liquidity for up to 28 days that the market was refusing to provide. Shortly thereafter, FRBNY had a change of heart and told Bear Stearns that the 28-day loan was unavailable to them.[23] The deal was then changed to where FRBNY would create a company (what would become Maiden Lane LLC) to buy $30 billion worth of Bear Stearns' assets, and Bear Stearns would be purchased by JPMorgan Chase in a stock swap worth $2 a share, or less than 7 percent of Bear Stearns' market value just two days before.[24] 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. Eventually, after renegotiating the purchase of Bear Stearns, Maiden Lane LLC was funded by a $29 billion first priority loan from FRBNY and a $1 billion subordinated loan from JPMorgan Chase, without further recourse to JPMorgan Chase.[25] The structure of the transaction, with both loans collateralized by securitized home mortgages[26] and with the JPMorgan Chase loan bearing losses before the FRBNY loan, meant that FRBNY could not seize or otherwise encumber JPMorgan Chase's assets if the underlying collateral became insufficient to repay the FRBNY loan.[26][27] Federal Reserve Chairman Ben Bernanke defended the bailout by stating that a bankruptcy of Bear Stearns would have affected the real economy and could have caused a "chaotic unwinding" of investments across US markets.[24][28]
On March 20,
On March 24, 2008, a class action suit was filed on behalf of shareholders, challenging the terms of JPMorgan's acquisition of Bear Stearns.[30] 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.[31] The revised deal was aimed to quiet upset investors and was necessitated by what was characterized as loophole in a guarantee that was open-ended, despite the fact that the deal required shareholder approval.[32] While it was not clear if JPMorgan's lawyers, Wachtell, Lipton, Rosen & Katz, were to blame for the mistake in the hastily written contract, JPMorgan's CEO, Jamie Dimon, was described as being "apoplectic" about the mistake.[33] The Bear Stearns bailout was seen as an extreme-case scenario, and continues to raise significant questions about Fed intervention. On April 8, 2008, former Fed chairman Paul Volcker stated that the Fed had 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.[34] On May 29, Bear Stearns shareholders approved the sale to JPMorgan Chase at the $10-per-share price.[35]
An article by journalist
Structure prior to collapse
Managing partners/chief executive officers
- Salim L. Lewis: 1949–1978
- Alan C. Greenberg: 1978–1993
- James Cayne: 1993–2008
- Alan Schwartz: 2008
The largest Bear Stearns shareholders as of December 2007 were:[39]
- Barrow Hanley Mewhinney & Strauss – 9.73%
- Joseph C. Lewis– 9.36%
- Morgan Stanley – 5.37%
- James Cayne – 4.94%
- Legg Mason Capital Management – 4.84%
- Private Capital Management – 4.49%
- Barclays Global Investors– 3.10%
- State Street Global Advisors – 3.01%
- The Vanguard Group – 2.67%
- Janus Capital Management – 2.34%
See also
- Primary dealer
- Bankruptcy of Lehman Brothers
- Bear Stearns Merchant Banking
References
- ^ "Bear Stearns collapses, sold to J.P. Morgan Chase". History.com. A&E Television Networks. January 19, 2018. Retrieved June 28, 2023.
- ISBN 978-1-59420-239-1
- ISSN 0362-4331. Retrieved March 16, 2018.
- ^ Ross, Andrew (March 17, 2008). "JP Morgan Pays $2 a Share for Bear Stearns". The New York Times. Retrieved on September 30, 2008.
- ^ Bear Stearns Brand Finally Fades, Two Years After Collapse
- ^ DealBook. The New York Times. March 17, 2008. Retrieved March 17, 2008.
- ^ "Bear Stearns Companies, Inc.", International Directory of Company Histories, Vol. 52, St. James Press, 2003
- ^ Tim McLaughlin (November 28, 2007). "Bear Stearns to cut 650 jobs globally". Reuters. Archived from the original on September 24, 2015. Retrieved June 30, 2017.
- ^ "America's Most Admired Companies 2007 Fortune". CNN. Retrieved August 23, 2011.
- ^ Boyd, Roddy (March 31, 2008). "The last days of Bear Stearns". Fortune. Archived from the original on September 19, 2008. Retrieved on September 30, 2008.
- ^ Burrough, Bryan. "Bringing Down Bear Stearns". Vanity Fair. Retrieved June 19, 2013.
- ^ Creswell, Julie; Bajaj, Vikas (June 23, 2007), "$3.2 Billion Move by Bear Stearns to Rescue Fund", The New York Times, retrieved April 16, 2008
- ^ Siew, Walden; Yoon, Al (June 21, 2007), "Bear Stearns CDO liquidation sparks contagion fears", Reuters, archived from the original on October 6, 2014, retrieved June 30, 2017
- ^ Pittman, Mark (June 21, 2007), "Bear Stearns Fund Collapse Sends Shock Through CDOs", Bloomberg, retrieved April 16, 2008
- ^ Bajaj, Vikas (June 30, 2007), "Bear Stearns Shakes Up Funds Unit", The New York Times, retrieved April 16, 2008
- ^ Grynbaum, Michael M. (September 21, 2007), "Bear Stearns Profit Plunges 61% on Subprime Woes", The New York Times, retrieved September 14, 2008
- ^ Basar, Shanny; Ahuja, Vivek (November 15, 2007), "Bear downgraded in face of first loss in 83 years", Financial News Online, retrieved April 16, 2008
- ^ "Behind the Scenes of Bear's Fund Meltdown". DealBook. The New York Times. June 19, 2008.
- ^ "2 Former Bear Stearns Managers Arrested". The New York Times. Associated Press. June 19, 2008. Retrieved June 19, 2008.
- ^ Charges at Bear Stearns linked to subprime debacle Archived June 20, 2008, at the Wayback Machine By Tom Hays, Associated Press, June 19, 2008.
- ^ Ex-Bear Stearns managers arrested at their homes Archived June 20, 2008, at the Wayback Machine By Tom Hays, Associated Press, 6/19/08.
- ^ More Bad News for Jeff Epstein? July 11, 2007, Dealbook, The New York Times retrieved 2011 3 25
- ^ Frontline: Inside the Meltdown – You Have a Weekend to Save Yourself Retrieved February 26, 2009
- ^ a b Fed Aided Bear Stearns as Firm Faced Chapter 11, Bernanke Says. Bloomberg, April 2, 2008
- ^ "JPMorgan Chase and Bear Stearns Announce Amended Agreement". JPMorgan Chase & Co. March 24, 2008. Archived from the original on March 26, 2008.
- ^ a b "Bear Stearns Bondholders Win Big". Seeking Alpha. March 27, 2008. Retrieved June 19, 2013.
- ^ "Weekly Market Comment: Why is Bear Stearns Trading at $6 Instead of $2". Hussman Funds. March 24, 2008. Retrieved June 19, 2013.
- ^ "Bernanke Defends Bear Stearns Bailout". CBS News. April 3, 2008.
- ^ Chairman Cox Letter To Basel Committee In Support Of New Guidance On Liquidity Management (PDF), March 20, 2008, retrieved April 16, 2008
- ^ C&T Files Complaint and Temporary Restraining Order Challenging Bear Stearns Buyout by JPMorgan, March 24, 2008, archived from the original on May 13, 2008, retrieved April 16, 2008
- ^ "Seeking Fast Deal, JPMorgan Quintuples Bear Stearns Bid". The New York Times, March 25, 2008.
- ^ Carney, John. "Did JP Morgan Understand The Bear Stearns Guarantee?". Dealbreaker. Retrieved September 22, 2019.
- ^ "Drafting Errors in the Bear Stearns Merger Agreement? What a Shock!". Adams on Contract Drafting. March 24, 2008. Retrieved September 23, 2019.
- ^ Niall Ferguson: The Ascent of Money: A Financial History of The World, Chapter 6: From Empire to Chimerica; Chimerica, p. 338
- ^ White, Ben (May 29, 2008), "Bear Stearns passes into Wall Street history", Financial Times
- ^ Taibbi, Matt (October 2009). "Wall Street's Naked Swindle". Rolling Stone. Retrieved October 15, 2009.
- ^ Naked Short Selling: The Emperor's New Clothes? Centre for Financial Research, May 22, 2009.
- ^ "25 People to Blame for the Financial Crisis". Time. February 11, 2009. Archived from the original on August 19, 2017. Retrieved December 28, 2021.
{{cite magazine}}
: CS1 maint: unfit URL (link) - ^ Wright, William (March 17, 2008). "Employees lose $5bn on Bear Stearns". Financial News. Retrieved on September 30, 2008.
Further reading
- William Cohan, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, 2010.