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what happened to make the firm bear stearns go out of business?

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American investment depository financial institution

The Acquit Stearns Companies, Inc.
Type Public

Traded as

 NYSE: BSC
Manufacture Investment services
Founded May 1, 1923
Defunct March 2008
Fate Caused by JPMorgan Chase
Successor JPMorgan Hunt
Headquarters New York City, United states of america

Key people

 Alan Schwartz, former CEO
James Cayne, former Chairman & CEO
Products Fiscal services
Investment cyberbanking
Investment management
Website www.bear.com (redirect to JPMorgan Chase)

The Bear Stearns Companies, Inc. was a New York-based global investment depository financial institution, securities trading and brokerage firm that failed in 2008 as part of the global financial crisis and recession, and was subsequently sold to JPMorgan Chase. The company'due south main business areas before its failure were capital markets, investment banking, wealth management, and global clearing services, and information technology was heavily involved in the subprime mortgage crisis.

In the years leading upwardly to the failure, Acquit 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".[1] Every bit investor losses mounted in those markets in 2006 and 2007, the company actually increased its exposure, especially to the mortgage-backed assets that were key to the subprime mortgage crunch. In March 2008, the Federal Reserve Bank of New York provided an emergency loan to try to avert a sudden collapse of the visitor. The company could non be saved, even so, and was sold to JPMorgan Chase for $10 per share,[2] a price far below its pre-crisis 52-week high of $133.20 per share, only not equally low as the $2 per share originally agreed upon by Comport Stearns and JPMorgan Hunt.[three]

The collapse of the company was a prelude to the risk management meltdown of the investment cyberbanking industry in the United States and elsewhere that culminated in September 2008, and the subsequent global financial crisis of 2008–2009. In Jan 2010, JPMorgan ceased using the Bear Stearns name.[four]

History [edit]

Conduct Stearns was founded as an disinterestedness trading house on May 1, 1923, past Joseph Ainslie Bear, Robert B. Stearns and Harold C. 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 showtime international office in Amsterdam.[5]

In 1985, Comport Stearns became a publicly traded company.[5] 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 inquiry, private client services, derivatives, foreign exchange and futures sales and trading, nugget management, and custody services. Through Conduct Stearns Securities Corp., it offered global clearing services to broker dealers, prime broker clients and other professional person traders, including securities lending.[6]

Bear Stearns' World Headquarters was located at 383 Madison Avenue, between East 46th Street and E 47th Street in Manhattan. Past 2007, the company employed more than than xv,500 people worldwide.[vii] 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, Carry Stearns was recognized as the "Most Admired" securities firm in Fortune's "America's Most Admired Companies" survey, and second overall in the securities house department.[8] The annual survey is a prestigious ranking of employee talent, quality of risk direction and business concern innovation. This was the second time in three years that Bear Stearns had achieved this "top" distinction.

Lead-upwardly to the failure – increasing exposure to subprime mortgages [edit]

Past November 2006, the company had total majuscule of approximately $66.7 billion and full avails of $350.four billion and according to the April 2005 upshot of Institutional Investor mag, Comport Stearns was the seventh-largest securities business firm in terms of total capital.

A year later on Bear Stearns had notional contract amounts of approximately $13.40 trillion in derivative financial instruments, of which $1.85 trillion were listed futures and selection contracts. In add-on, Behave Stearns was conveying more than $28 billion in 'level 3' assets on its books at the stop of fiscal 2007 versus a net equity position of only $11.1 billion. This $11.1 billion supported $395 billion in avails,[9] which means a leverage ratio of 35.6 to one. 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.

Beginning of the crunch – 2 subprime mortgage funds neglect [edit]

On June 22, 2007, Conduct Stearns pledged a collateralized loan of upwardly to $3.two billion to "bail out" ane 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 Behave Stearns Loftier-Form Structured Credit Enhanced Leveraged Fund. Deport Stearns had originally put up just $25 one thousand thousand, so they were hesitant about the bailout; nonetheless, CEO James Cayne and other senior executives worried most the damage to the company's reputation.[10] [11] The funds were invested in thinly traded collateralized debt obligations (CDOs). Merrill Lynch seized $850 1000000 worth of the underlying collateral but only was able to sale $100 million of them. The incident sparked business of contagion as Deport Stearns might exist forced to liquidate its CDOs, prompting a mark-down of similar assets in other portfolios.[12] [13] Richard A. Marin, a senior executive at Behave Stearns Nugget Direction responsible for the two hedge funds, was replaced on June 29 past Jeffrey B. Lane, a former Vice Chairman of rival investment banking concern Lehman Brothers.[14]

During the calendar week of July 16, 2007, Bear Stearns disclosed that the ii subprime hedge funds had lost nearly all of their value amongst a rapid turn down in the market for subprime mortgages.

On Baronial i, 2007, investors in the two funds took activity confronting Bear Stearns and its top board and risk management managers and officers. The constabulary firms of Jake Zamansky & Assembly 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 Carry Stearns. Co-President Warren Spector was asked to resign on Baronial 5, 2007, as a result of the plummet of two hedge funds tied to subprime mortgages. A September 21 study in The New York Times noted that Bear Stearns posted a 61 percent drop in net profits due to their hedge fund losses.[15] With Samuel Molinaro'southward November xv revelation that Acquit Stearns was writing down a further $1.2 billion in mortgage-related securities and would confront its first loss in 83 years, Standard & Poor'southward downgraded the visitor'due south credit rating from AA to A.[16]

Matthew Tannin and Ralph R. Cioffi, both former managers of hedge funds at Bear Stearns Companies, were arrested June xix, 2008.[17] They faced criminal charges and were found non guilty of misleading investors about the risks involved in the subprime market. Tannin and Cioffi were besides named in lawsuits brought by Barclays Bank, which claimed they were i of the many investors misled past the executives.[eighteen] [19]

They were likewise named in civil lawsuits brought in 2007 by investors, including Barclays Bank, who claimed they had been misled. Barclays claimed that Bear Stearns knew that certain assets in the Bear Stearns Loftier-Grade Structured Credit Strategies Enhanced Leverage Chief Fund were worth much less than their professed values. The suit claimed that Conduct Stearns managers devised "a plan to make more than coin for themselves and further to utilise the Enhanced Fund as a repository for risky, poor-quality investments." The lawsuit said Bear Stearns told Barclays that the enhanced fund was up nigh vi% through June 2007—when "in reality, the portfolio'south asset values were plummeting."[xx]

Other investors in the fund included Jeffrey E. Epstein's Financial Trust Company.[21]

Fed bailout and auction to JPMorgan Chase [edit]

On March 14, 2008, the Federal Reserve Banking company of New York ("FRBNY") agreed to provide a $25 billion loan to Bear Stearns collateralized by unencumbered assets from Deport Stearns in order to provide Bear Stearns the liquidity for up to 28 days that the market was refusing to provide. Presently thereafter, FRBNY had a change of center and told Behave Stearns that the 28-day loan was unavailable to them.[22] The deal was then changed to where FRBNY would create a company (what would become Maiden Lane LLC) to purchase $30 billion worth of Bear Stearns' assets, and Acquit Stearns would be purchased by JPMorgan Chase in a stock bandy worth $2 a share, or less than 7 per centum of Bear Stearns' marketplace value just ii days before.[23] This sale price represented a staggering loss every bit its stock had traded at $172 a share every bit late equally Jan 2007, and $93 a share equally late as February 2008. Eventually, subsequently renegotiating the buy of Conduct Stearns, Maiden Lane LLC was funded past a $29 billion get-go priority loan from FRBNY and a $one billion subordinated loan from JPMorgan Hunt, without further recourse to JPMorgan Chase.[24] The construction of the transaction, with both loans collateralized by securitized dwelling house mortgages[25] and with the JPMorgan Hunt loan begetting losses before the FRBNY loan, meant that FRBNY could non seize or otherwise encumber JPMorgan Chase's avails if the underlying collateral became insufficient to repay the FRBNY loan.[25] [26] Chairman of the Fed, Ben Bernanke, dedicated the bailout past stating that a bankruptcy of Bear Stearns would have afflicted the real economy and could have acquired a "chaotic unwinding" of investments across the Us markets.[23] [27]

On March xx, Securities and Commutation 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' bug escalated when rumors spread almost its liquidity crunch which in turn eroded investor conviction in the firm. "Notwithstanding that Bear Stearns connected to take high quality collateral to provide as security for borrowings, market counterparties became less willing to enter into collateralized funding arrangements with Comport Stearns," said Cox. Behave Stearns' liquidity puddle started at $eighteen.1 billion on March ten and then plummeted to $2 billion on March 13. Ultimately market rumors almost Bear Stearns' difficulties became self-fulfilling, Cox said.[28]

On March 24, 2008, a form activeness was filed on behalf of shareholders, challenging the terms of JPMorgan'due south recently announced acquisition of Bear Stearns.[29] That aforementioned day, a new agreement was reached that raised JPMorgan Chase'southward offer to $10 a share, up from the initial $2 offer, which meant an offer of $1.ii billion.[30] The revised deal was aimed to quiet upset investors and was necessitated by what was characterized as loophole in a guarantee that was open up ended, despite the fact that the bargain required shareholder approval.[31] While it was not clear if JPMorgan's lawyers, Wachtell, Lipton, Rosen & Katz, were to blame for the fault in the hastily written contract, JPMorgan'due south CEO, Jamie Dimon, was described as being "apoplectic" near the mistake.[32] The Bear Stearns bailout was seen equally an extreme-example scenario, and continues to raise significant questions nearly 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.' Come across his remarks at a Lunch of the Economic Gild of New York.[33] On May 29, Bear Stearns shareholders canonical the sale to JPMorgan Chase at the $10-per-share cost.[34]

An commodity by journalist Matt Taibbi for Rolling Stone contended that naked short selling had a part in the demise of both Conduct Stearns and Lehman Brothers.[35] A study by finance researchers at the Academy of Oklahoma Cost Higher of Business studied trading in financial stocks, including Comport Stearns and Lehman Brothers, and found "no testify that stock price declines were caused by naked short selling."[36] Time Magazine also labelled former Conduct Sterns head James Cayne as the CEO most responsible out of all the CEOs who "screwed upwards Wall Street" during the Fiscal crisis of 2007–2008, fifty-fifty reporting that "none seemed more than asleep at the switch than Behave Stearns' Cayne."[37]

Structure prior to collapse [edit]

Managing Partners/Chief Executive Officers [edit]

  • Salim L. Lewis: 1949–1978
  • Alan C. Greenberg: 1978–1993
  • James Cayne: 1993–2008
  • Alan Schwartz: 2008–collapse

Major shareholders [edit]

The largest Bear Stearns shareholders equally of December 2007 were:[38]

  • Barrow Hanley Mewhinney & Strauss – 9.73%
  • Joseph C. Lewis – nine.36%
  • Morgan Stanley – 5.37%
  • James Cayne – 4.94%
  • Legg Stonemason Capital Direction – four.84%
  • Individual Upper-case letter Management – iv.49%
  • Barclays Global Investors – 3.10%
  • State Street Global Advisors – 3.01%
  • The Vanguard Group – two.67%
  • Janus Uppercase Management – 2.34%

See also [edit]

  • Primary dealer
  • Bankruptcy of Lehman Brothers
  • Bear Stearns Merchant Cyberbanking

References [edit]

  1. ^ Lowenstein, Roger The End Of Wall Street, Penguin Printing 2010, pp.xvii,22 ISBN 978-i-59420-239-i
  2. ^ Sorkin, Andrew Ross (March 24, 2008). "JPMorgan Raises Bid for Behave Stearns to $two a Share". The New York Times. ISSN 0362-4331. Retrieved March 16, 2018.
  3. ^ Ross, Andrew (March 17, 2008). "JP Morgan Pays $ii a Share for Behave Stearns". The New York Times. Retrieved on September 30, 2008.
  4. ^ Bear Stearns Brand Finally Fades, Two Years After Collapse
  5. ^ a b "Could Deport Stearns Do Ameliorate?". The New York Times. March 17, 2008. Retrieved March 17, 2008.
  6. ^ "Bear Stearns Companies, Inc.", International Directory of Company Histories, Vol. 52, St. James Press, 2003
  7. ^ Tim McLaughlin (November 28, 2007). "Carry Stearns to cut 650 jobs globally". Reuters. Archived from the original on September 24, 2015. Retrieved June 30, 2017.
  8. ^ "America's Well-nigh Admired Companies 2007 FORTUNE". CNN . Retrieved August 23, 2011.
  9. ^ Boyd, Roddy (March 31, 2008). "The terminal days of Deport Stearns". Fortune. Archived from the original on September 19, 2008. Retrieved on September thirty, 2008.
  10. ^ Burrough, Bryan. "Bringing Downwards Acquit Stearns". Vanity Off-white . Retrieved June 19, 2013.
  11. ^ Creswell, Julie; Bajaj, Vikas (June 23, 2007), "$3.2 Billion Move by Carry Stearns to Rescue Fund", The New York Times , retrieved April 16, 2008
  12. ^ Siew, Walden; Yoon, Al (June 21, 2007), "Behave Stearns CDO liquidation sparks contagion fears", Reuters, archived from the original on October 6, 2014, retrieved June xxx, 2017
  13. ^ Pittman, Mark (June 21, 2007), "Bear Stearns Fund Plummet Sends Stupor Through CDOs", Bloomberg , retrieved April 16, 2008
  14. ^ Bajaj, Vikas (June thirty, 2007), "Bear Stearns Shakes Upwardly Funds Unit of measurement", New York Times , retrieved Apr sixteen, 2008
  15. ^ Grynbaum, Michael M. (September 21, 2007), "Bear Stearns Profit Plunges 61% on Subprime Woes", The New York Times , retrieved September fourteen, 2008
  16. ^ Basar, Shanny; Ahuja, Vivek (November fifteen, 2007), "Carry downgraded in face of first loss in 83 years", Financial News Online , retrieved April 16, 2008
  17. ^ DealBook (June nineteen, 2008). "Behind the Scenes of Bear's Fund Meltdown". The New York Times.
  18. ^ "two Quondam Bear Stearns Managers Arrested". NY Times. Associated Printing. June xix, 2008. Retrieved June 19, 2008.
  19. ^ Charges at Carry Stearns linked to subprime debacle Archived June 20, 2008, at the Wayback Machine By TOM HAYS, Associated Printing Writer, vi/19/08.
  20. ^ Ex-Bear Stearns managers arrested at their homes Archived June 20, 2008, at the Wayback Automobile By Tom Hays, Associated Printing, vi/xix/08.
  21. ^ More Bad News for Jeff Epstein? JULY 11, 2007, Dealbook, New York Times retrieved 2011 3 25
  22. ^ FRONTLINE: Inside the Meltdown – You Accept a Weekend to Salve Yourself Retrieved February 26, 2009
  23. ^ a b Fed Aided Bear Stearns as Firm Faced Chapter xi, Bernanke Says. Bloomberg, Apr 2, 2008
  24. ^ "JPMorgan Chase and Bear Stearns Announce Amended Understanding". JPMorgan Chase & Co. March 24, 2008. Archived from the original on March 26, 2008.
  25. ^ a b "Bear Stearns Bondholders Win Big". Seeking Alpha. March 27, 2008. Retrieved June 19, 2013.
  26. ^ "Weekly Market Comment: Why is Deport Stearns Trading at $half-dozen Instead of $2". Hussman Funds. March 24, 2008. Retrieved June 19, 2013.
  27. ^ "Bernanke Defends Bear Stearns Bailout". CBS News. April three, 2008.
  28. ^ Chairman Cox Alphabetic character To Basel Committee In Support Of New Guidance On Liquidity Direction (PDF), March 20, 2008, retrieved April sixteen, 2008
  29. ^ C&T Files Complaint and Temporary Restraining Lodge Challenging Acquit Stearns Buyout by JPMorgan, March 24, 2008, archived from the original on May 13, 2008, retrieved April sixteen, 2008
  30. ^ Seeking Fast Bargain, JPMorgan Quintuples Carry Stearns Bid. New York Times, March 25, 2008
  31. ^ Carney, John. "Did JP Morgan Understand The Bear Stearns Guarantee?". Dealbreaker . Retrieved September 22, 2019.
  32. ^ "Drafting Errors in the Bear Stearns Merger Agreement? What a Shock!". Adams on Contract Drafting. March 24, 2008. Retrieved September 23, 2019.
  33. ^ Niall Ferguson: The Rise of Money: A Financial History of The World, Chapter 6: From Empire to Chimerica; Chimerica, p. 338
  34. ^ White, Ben (May 29, 2008), "Bear Stearns passes into Wall Street history", Fiscal Times
  35. ^ Taibbi, Matt (October 2009). "Wall Street's Naked Swindle". Rolling Stone . Retrieved October 15, 2009.
  36. ^ Naked Short Selling: The Emperor's New Clothes? Center for Financial Research, May 22, 2009.
  37. ^ "25 People to Blame for the Financial Crunch". Time. Feb 11, 2009. Archived from the original on Dec 28, 2021. Retrieved December 28, 2021. {{cite news}}: CS1 maint: unfit URL (link)
  38. ^ Wright, William (March 17, 2008). "Employees lose $5bn on Acquit Stearns". Financial News. Retrieved on September 30, 2008.

Further reading [edit]

  • William Cohan, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, 2010.

External links [edit]

  • JPMorgan Securities home folio
  • FRONTLINE: Inside the Meltdown Analysis—The Behave Stearns Rescue
  • The New York Times Timeline of Bear Stearns' history
  • Bloomberg: JPMorgan Chase to Buy Bear Stearns for $240 Million
  • J.P. Morgan Buys Bear in Fire Sale, Equally Fed Widens Credit to Avert Crisis - WSJ

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Source: https://en.wikipedia.org/wiki/Bear_Stearns

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