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Bear Stearns

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The Bear Stearns Companies, Inc.
Company typePublic
NYSE: BSC
IndustryInvestment services
Founded1 May 1923
DefunctMarch 2008
Fateacquired by JPMorgan Chase
SuccessorJPMorgan Chase
HeadquartersNew York City, US
Key people
Alan Schwartz, former CEO
James Cayne, former Chairman & CEO
ProductsFinancial services
Investment banking
Investment management
Websitewww.bear.com

The Bear Stearns Companies, Inc. was a New York-based global investment bank, 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's main business areas before its failure were capital markets, investment banking, wealth management, and global clearing services, and it was heavily involved in the subprime mortgage crisis.

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".[1] 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,[2] 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 by Bear Stearns and JPMorgan Chase.[3]

The collapse of the company was a prelude to the risk management meltdown of the investment banking industry in the United States and elsewhere that culminated in September 2008, and the subsequent global financial crisis of 2008–2009. In January 2010, JPMorgan ceased using the Bear Stearns name.[4]

History

Bear Stearns' former offices at 383 Madison Avenue

Bear Stearns was founded as an equity trading house on May 1, 1923 by 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 first international office in Amsterdam.[5]

In 1985, Bear 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 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.[6] 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."[citation needed]

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.[7] 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.[8] 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 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,[9] which means a leverage ratio of 35.6 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.

Start of the crisis – two subprime mortgage funds fail

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

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.[10][11] The funds were invested in thinly traded collateralized debt obligations (CDOs). 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.[12][13] 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.[14]

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 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. Co-President Warren Spector was asked to resign on August 5, 2007, as a result of the collapse of two hedge funds tied to subprime mortgages. 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.[15] 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.[16]

Matthew Tannin and Ralph R. Cioffi, both former managers of hedge funds at Bear Stearns Companies, were arrested June 19, 2008.[17] They faced criminal charges and were found not guilty of misleading investors about the risks involved in the subprime market. Tannin and Cioffi were also been named in lawsuits brought by Barclays Bank, which claimed they were one of the many investors misled by the executives.[18][19]

They were also 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 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."[20]

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

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.[22] 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.[23] 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.[24] The structure of the transaction, with both loans collateralized by securitized home mortgages[25] 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.[25][26] Chairman of the Fed, 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 the US markets.[23][27]

On March 20, Securities and Exchange 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's problems escalated when rumors spread about its liquidity crisis which in turn eroded investor confidence in the firm. "Notwithstanding that Bear Stearns continued to have high quality collateral to provide as security for borrowings, market counterparties became less willing to enter into collateralized funding arrangements with Bear Stearns," said Cox. Bear Stearns' liquidity pool started at $18.1 billion on March 10 and then plummeted to $2 billion on March 13. Ultimately market rumors about Bear Stearns' difficulties became self-fulfilling, Cox said.[28]

On March 24, 2008, a class action was filed on behalf of shareholders, challenging the terms of JPMorgan’s recently announced acquisition of Bear Stearns.[29] 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.[30] The revised deal was aimed to quiet upset investors and was necessitated by what was characterized as loophole in a guaranty that was open ended, despite the fact that the deal required shareholder approval.[31] 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.[32] The Bear Stearns bailout was seen as an extreme-case scenario, and continues to raise significant questions about 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.' See his remarks at a Luncheon of the Economic Club of New York.[33] On May 29, Bear Stearns shareholders approved the sale to JPMorgan Chase at the $10-per-share price.[34]

An article by journalist Matt Taibbi for Rolling Stone contended that naked short selling had a role in the demise of both Bear Stearns and Lehman Brothers.[35] A study by finance researchers at the University of Oklahoma Price College of Business studied trading in financial stocks, including Bear Stearns and Lehman Brothers, and found "no evidence that stock price declines were caused by naked short selling."[36]

Structure prior to collapse

Managing Partners/Chief Executive Officers

Major shareholders

The largest Bear Stearns shareholders as of December 2007 were:[37]

See also

References

  1. ^ Lowenstein, Roger The End Of Wall Street, Penguin Press 2010, pp.xvii,22 ISBN 978-1-59420-239-1
  2. ^ Sorkin, Andrew Ross (March 24, 2008). "JPMorgan Raises Bid for Bear Stearns to $2 a Share". The New York Times. ISSN 0362-4331. Retrieved March 16, 2018.
  3. ^ Ross, Andrew (March 17, 2008). "JP Morgan Pays $2 a Share for Bear Stearns". The New York Times. Retrieved on September 30, 2008.
  4. ^ Bear Stearns Brand Finally Fades, Two Years After Collapse
  5. ^ a b "Could Bear Stearns Do Better?". 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). "Bear Stearns to cut 650 jobs globally". Reuters.
  8. ^ "America's Most Admired Companies 2007 FORTUNE". CNN. Retrieved August 23, 2011.
  9. ^ 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.
  10. ^ Burrough, Bryan. "Bringing Down Bear Stearns". Vanity Fair. Retrieved June 19, 2013.
  11. ^ 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
  12. ^ Siew, Walden; Yoon, Al (June 21, 2007), "Bear Stearns CDO liquidation sparks contagion fears", Reuters
  13. ^ Pittman, Mark (June 21, 2007), "Bear Stearns Fund Collapse Sends Shock Through CDOs", Bloomberg, retrieved April 16, 2008
  14. ^ Bajaj, Vikas (June 30, 2007), "Bear Stearns Shakes Up Funds Unit", New York Times, retrieved April 16, 2008
  15. ^ Grynbaum, Michael M. (September 21, 2007), "Bear Stearns Profit Plunges 61% on Subprime Woes", The New York Times, retrieved September 14, 2008
  16. ^ Basar, Shanny; Ahuja, Vivek (November 15, 2007), "Bear downgraded in face of first loss in 83 years", Financial News Online, retrieved April 16, 2008
  17. ^ DealBook (June 19, 2008). "Behind the Scenes of Bear's Fund Meltdown". The New York Times.
  18. ^ "2 Former Bear Stearns Managers Arrested". NY Times. Associated Press. June 19, 2008. Retrieved June 19, 2008.
  19. ^ Charges at Bear Stearns linked to subprime debacle Archived June 20, 2008, at the Wayback Machine By TOM HAYS, Associated Press Writer, 6/19/08.
  20. ^ Ex-Bear Stearns managers arrested at their homes Archived June 20, 2008, at the Wayback Machine By Tom Hays, Associated Press, 6/19/08.
  21. ^ More Bad News for Jeff Epstein? JULY 11, 2007, Dealbook, New York Times retrieved 2011 3 25
  22. ^ FRONTLINE: Inside the Meltdown – You Have a Weekend to Save Yourself Retrieved February 26, 2009
  23. ^ a b Fed Aided Bear Stearns as Firm Faced Chapter 11, Bernanke Says. Bloomberg, April 2, 2008
  24. ^ "JPMorgan Chase and Bear Stearns Announce Amended Agreement". 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 Bear Stearns Trading at $6 Instead of $2". Hussman Funds. March 24, 2008. Retrieved June 19, 2013.
  27. ^ "Bernanke Defends Bear Stearns Bailout". CBS News. April 3, 2008.
  28. ^ Chairman Cox Letter To Basel Committee In Support Of New Guidance On Liquidity Management (PDF), March 20, 2008, retrieved April 16, 2008
  29. ^ 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
  30. ^ Seeking Fast Deal, JPMorgan Quintuples Bear 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 Ascent 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", Financial 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? Centre for Financial Research, May 22, 2009.
  37. ^ Wright, William (March 17, 2008). "Employees lose $5bn on Bear Stearns". Financial News. Retrieved on September 30, 2008.

Further reading

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