Finance in the News: Bear Stearns

October 2, 2008 · Posted in Banks, Finance 

Before its recent collapse this year (2008), The Bear Stearns Companies, Inc. was one of the largest securities trading and brokerage firms and one of the largest global investment banks in the world. The main areas of business that Bear Stearns covered were the following: capital markets (fixed income, equities, investment banking), wealth management, and global clearing services.

Bear Stearns was founded in 1923 as an equity trading house, with five hundred thousand dollars in capital, by Robert Stearns, Joseph Bear and Harold Mayer. The company made it through the stock market crash of 1929 without having to lay off any employees. In 1933, it opened its first Chicago branch office, and in 1955, it opened the doors of its first international office in Amsterdam.

Bear Stearns became a publically traded company in 1985, counting individuals as well as corporations and governments as clients, with services including mergers and acquisitions, trading and research, foreign exchange, futures sales and trading, asset management, corporate finance, and more. It offered global clearing to broker dealers, broker clients and other professional traders, as well as securities lending, through its Bear Stearns Securities Corp. branch. Collectively, Bear Stearns was named the seventh largest securities firm in the world in terms of total capital in 2005, and in 2006, had a total capital of somewhere around $66 billion and total assets in the neighborhood of $350 billion.

By March of 2008, though, it was in big trouble. Bear Stearns became involved with the Community Reinvestment Act in 1997. These CRA loans were given to people that would otherwise be considered unworthy of credit in an effort to “end discrimination.” This was the beginning of what would eventually lead to Bear Stearns involvement in the 2007 subprime mortgage crisis and its subsequent demise. In July of 2007, two subprime hedge funds had lost nearly all of their value. Lawsuits filed on behalf of investors against Bear Stearns quickly followed, and two former managers of the failed hedge funds were arrested in June of 2008, facing criminal charges of misleading investors about the risks of investing in subprime markets.

In March of 2008, the Federal Reserve Bank of New York in conjunction with JPMorgan Chase provided an emergency loan to Bear Stearns in an attempt to prevent a market crash from the company becoming insolvent. Two days later, Bear Stearns signed a merger agreement with JPMorgan Chase at $2 a share (less than 10 percent of market value), which prompted a class action lawsuit filed on behalf of shareholders. In response, the offer was adjust to $10 a share, and on May 29th of 2008, the sale to JPMorgan Chase was approved.


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