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The fate of the Bear Stearns company in the United States during the subprime mortgage crisis sparked a great deal of public comment and concern. Over the course of one month, the company's stock value fell from almost $100 US Dollars (USD) to $2 USD, in a precipitous decline, and the company feared that it would have to initiate bankruptcy proceedings before it was acquired by JPMorgan Chase on 16 March, 2008. What happened to Bear Stearns happened very quickly, and it was quite devastating, leading people to believe that the American economy was in serious trouble.
Bear Stearns and Company, Inc. was founded in 1923 to trade equities. By 2007, Bear Stearns had a number of branches including several hedge funds, and it was an incredibly popular and successful company, with stock values sometimes almost as high as $200 USD per share. The company was valued in the billions, employing almost 14,000 people.
Trouble at Bear Stearns started in 2007, when the company announced plans to stake a loan to one of its high-risk investment branches. The firm made arrangements with several other investment firms to float the loan, using collateralized debt obligations which turned out to be undervalued. As a result, shareholders became uneasy about the company's liquidity, and many attempted to withdraw their investments, attempting to escape before taking a major loss; some investors ended up taking heavy losses anyway, sparking a lawsuit in August 2007.
The lawyers in charge of the suit claimed that Bear Stearns had misled its investors; within days, the co-president had resigned, and faith in Bear Stearns was severely shaken. At a time when the firm desperately needed liquidity to manage its growing financial problems, investors were fleeing, causing a massive drop in profits which resulted in a downgrade of the company on the Standard & Poor's listing.
In March, 2008, it became readily apparent that Bear Stearns was in serious trouble. On 14 March, JPMorgan and the Federal Reserve Bank of New York agreed to extend a temporary loan to the company, causing a great deal of public comment. Many critics pointed out that some Bear Stearns executives weren't even present for the deal, suggesting that these individuals did not take the issue seriously. On 16 March, Bear Stearns made a merger agreement with JPMorgan Chase, allowing Chase to acquire the company in a stock swap. The announcement that the Bear Stearns stock was valued at only $2 US a share was quite a shock, even for people who had been following the issue.
The fate of Bear Stearns illustrates the far-reaching effects of the subprime mortgage crisis, and the danger of high risk loans and investments. It caused the Federal Reserve to rethink several key policies, and led to a general agreement that regulations on the financial market needed to be seriously adjusted to cope with the changing face of the market. Many such regulations dated back to the early 20th century, a very different time in the world of investing and wealth management.
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