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Bear Stearns, a successful investment bank, faced a rapid decline in 2008 due to subprime mortgage investments. Shareholders withdrew investments, leading to a merger with JPMorgan Chase and a reevaluation of financial regulations.
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 a month, the value of the company’s shares fell from nearly $100 US dollars (USD) to $2 dollars, in a precipitous drop, and the company feared it would have to file for bankruptcy before it JPMorgan Chase acquired it on March 16, 2008. What happened to Bear Stearns happened very quickly and was quite devastating, leading people to believe that the US economy was in serious trouble.
Bear Stearns and Company, Inc. was founded in 1923 to trade stocks. In 2007, Bear Stearns had several branches, including several hedge funds, and was an incredibly popular and successful company, with stock values sometimes nearly as high as $200 per share. The company was valued in the billions, employing almost 14,000 people.
The troubles at Bear Stearns began in 2007, when the company announced plans to stake a loan on one of its subprime investment branches. The firm made arrangements with several other investment firms to float the loan, using collateralized debt obligations that turned out to be undervalued. As a result, shareholders became concerned about the company’s liquidity and many tried to withdraw their investments, trying to escape before suffering a significant loss; some investors ended up taking heavy losses anyway, prompting a lawsuit in August 2007.
The lawyers in charge of the lawsuit alleged that Bear Stearns had misled its investors; Within days, the co-chairman had resigned, and faith in Bear Stearns was severely shaken. At a time when the company desperately needed liquidity to manage its mounting financial problems, investors fled, causing a massive drop in profits that resulted in the company being delisted by Standard & Poor’s.
In March 2008, it became apparent that Bear Stearns was in deep trouble. On March 14, JPMorgan and the Federal Reserve Bank of New York agreed to extend a temporary loan to the company, drawing a great deal of public comment. Many critics pointed out that some Bear Stearns executives were not even present for the deal, suggesting that these people did not take the issue seriously. On March 16, Bear Stearns reached a merger agreement with JPMorgan Chase, allowing Chase to acquire the company in a stock exchange. The announcement that Bear Stearns shares were valued at just $2 a share came as a shock, even to people who had been following the topic.
The fate of Bear Stearns illustrates the far-reaching effects of the subprime mortgage crisis and the danger of subprime lending and investing. He caused the Federal Reserve to reconsider several key policies and led to general agreement that financial market regulations needed to be seriously adjusted to cope with the changing face of the market. Many of these regulations date back to the early 20th century, a very different time in the world of investment and wealth management.
Smart Asset.
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