What Happened to Bear Stearns?
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-pre
It ran out of money. That can’t be good if you’re a bank. No. The stock is down more than 40 percent today, and off more than 50 percent this week. But surely the last thing this market needs right now is a bank failure? Right. So the Fed is riding to the rescue, “allowing Bear Stearns to access liquidity as needed.” Didn’t the Fed already do that on Tuesday, when it announced a new “Term Securities Lending Facility” available to investment banks? Yes, but the T.S.L.F. won’t go live until March 27. Bear Stearns couldn’t wait that long. So was the T.S.L.F. announcement a failure? It does look a bit like that. The T.S.L.F. was meant to boost confidence in the investment banks: When the markets have confidence in a bank, there are never any liquidity problems. The Fed might well have been hoping that the T.S.L.F. would provide enough of a generalized confidence boost that Bear Stearns in particular would be able to continue normal operations, at least until its money became available on M
It ran out of money. Here is much more, via Felix Salmon, and at least you can say that the Sitzkrieg is over and the plot is starting to unfold. And here’s a picture. Addendum: “…Bear Stearns, which has a leverage ratio of over 30 to 1, meaning it borrows more than 30 times the value of its $11 billion equity base.” Here is the link.
