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Bear Stearns

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Bear Stearns
Company typeSubsidiary of JPMorgan Chase
IndustryInvestment services
Founded1923
HeadquartersNew York City, New York USA
Key people
Alan Schwartz, former CEO
James Cayne, former Chairman & CEO
ProductsFinancial Services
Investment Banking
Investment Management
Number of employees
13,566 (11/2006)

The Bear Stearns Companies, Inc. (former NYSE ticker symbol BSC), based in New York City, was one of the largest global investment banks and securities trading and brokerage firms prior to its sale to JPMorgan Chase in 2008. The 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%).

Beginning in 2007, the company was badly damaged by 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 as low as ten dollars per share, a price far below the 52-week high of $133.20 per share, traded before the crisis, although not as low as the two dollars per share originally agreed upon by Bear Stearns and JP Morgan Chase.[1]

Overview

Bear Stearns was founded as an equity trading house in 1923 by Joseph Bear, Robert Stearns, and Harold Mayer with $500,000 in capital.[2]. Internal tensions quickly arose between 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.[2] In 1955, the firm opened its first international office in Amsterdam.[2] In 1985, Bear Stearns became a publicly traded company.[2] It served corporations, institutions, governments and individuals. The company's business included corporate finance, mergers and acquisitions, institutional equities and fixed income sales, 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.[3] 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, San Juan, Whippany, NJ and St. Louis. Internationally the firm had offices in London, Beijing, Dublin, 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 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 $236 million, or $2 per share. On March 24, 2008, that offer was raised to $1.1 billion or $10 per share 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.

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. See Bear Stearns' 2007 SEC 10k filing, on page 80.

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 assets,[4] 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.

Subprime mortgage hedge fund crisis

Main article: 2007 subprime mortgage financial crisis
See also: Subprime lending and Collateralized debt obligation

Bear Stearns made the first public securitization of Community Reinvestment Act (CRA) loans, starting in 1997.[5] Editorialists in some American newspapers[6][7] and US Congressman Ron Paul[8] say the CRA loans were lent to otherwise un-credit-worthy consumers in the name of ending racial discrimination, although an analysis of actual lending patterns does not generally support this conclusion.[9][10][11]

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.[12] [13] The funds were invested in thinly traded collateralized debt obligations (CDOs) found to be worth less than their mark-to-market value. 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.[14][15] 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.[16]

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 management. 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.[17]

Co-President Warren Spector was forced to resign on August 5, 2007, as a result of errant trades that led to the collapse of two hedge funds backed primarily by subprime loans. Cayne and Spector, the latter considered the apparent heir to become CEO, had been to a bridge tournament while the hedge funds ran into trouble; Cayne spent a week and a half there, Spector one week.[18] 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.[19] 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.[20]

Matthew Tannin and Ralph R. Cioffi, both former managers of hedge funds at Bear Stearns Companies, were arrested June 19, 2008. They are facing criminal charges and are suspected 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.[21][22]

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."[23]

See also

References

  1. ^ Ross, Andrew (March 17, 2008). "JP Morgan Pays $2 a Share for Bear Stearns". The New York Times. Retrieved on September 30, 2008.
  2. ^ a b c d "Could Bear Stearns Do Better?". The New York Times. 2008-03-17. Retrieved 2008-03-17. {{cite news}}: Italic or bold markup not allowed in: |publisher= (help)
  3. ^ "Bear Stearns Companies, Inc.". International Directory of Company Histories, Vol. 52. St. James Press. 2003.
  4. ^ Boyd, Roddy (March 31, 2008). "The last days of Bear Stearns". Fortune. Retrieved on September 30, 2008.
  5. ^ "First Union Capital Markets Corp., Bear, Stearns & Co. Price Securities Offering Backed by Affordable Mortgages". First Union Corporation (Wachovia).
  6. ^ Liebowitz, Stan. "The Real Scandal - How feds invited the mortgage mess". New York Post.
  7. ^ "A Mortgage Fable". Wall Street Journal. 2008-09-22. Retrieved 2008-09-27.
  8. ^ Paul, Ron (2008-09-23). "Commentary: Bailouts will lead to rough economic ride". CNN. Retrieved 2008-09-23.
  9. ^ Canner, Glenn (1997). "The Community Reinvestment Act and the profitability of mortgage-oriented banks". Finance and Economics Discussion Series (1997–7). Board of Governors of the Federal Reserve System. Retrieved 2008-10-01. {{cite journal}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  10. ^ Ellis, Luci. "The housing meltdown: Why did it happen in the United States?" (PDF). BIS Working Papers (259): 5.
  11. ^ Robert Gordon, Did Liberals Cause the Sub-Prime Crisis?, The American Prospect, April 7, 2008.
  12. ^ [1]
  13. ^ Creswell, Julie; Bajaj, Vikas (2007-06-23), "$3.2 Billion Move by Bear Stearns to Rescue Fund", New York Times, retrieved 2008-04-16
  14. ^ Siew, Walden; Yoon, Al (2007-06-21), "Bear Stearns CDO liquidation sparks contagion fears", Reuters [dead link]
  15. ^ Pittman, Mark (2007-06-21), "Bear Stearns Fund Collapse Sends Shock Through CDOs", Bloomberg, retrieved 2008-04-16
  16. ^ Bajaj, Vikas (2007-06-30), "Bear Stearns Shakes Up Funds Unit", New York Times, retrieved 2008-04-16
  17. ^ Herron, Jeremy (2007-08-01), "Fund Investors Launch Bear Claims", Associated Press
  18. ^ [2]
  19. ^ "Bear Stearns Profit Plunges 61% on Subprime Woes", New York Times, 2007-09-21, retrieved 2008-09-14
  20. ^ Basar, Shanny; Ahuja, Vivek (2007-11-15), "Bear downgraded in face of first loss in 83 years", Financial News Online, retrieved 2008-04-16
  21. ^ Associated Press (2008-06-19). ""2 Former Bear Stearns Managers Arrested"". NY Times. Retrieved 2008-06-19.
  22. ^ Charges at Bear Stearns linked to subprime debacle By TOM HAYS, Associated Press Writer, 6/19/08.
  23. ^ Ex-Bear Stearns managers arrested at their homes By Tom Hays, Associated Press, 6/19/08.
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