Bear Stearns#Start of the crisis – two subprime mortgage funds fail

File:BearStearns.JPG]]

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 ({{Inflation|US|500,000|1923

|fmt=eq}}). Internal tensions quickly arose among the three founders resulting in at least one public tussling. 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.{{cite news|url=https://archive.nytimes.com/www.nytimes.com/2008/03/17/business/17dealbook-could-be21779.html|title=Could Bear Stearns Do Better?|date=March 17, 2008|department=DealBook|work=The New York Times|access-date=February 15, 2025}}

In 1985, Bear Stearns became a publicly traded company. 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.{{Citation | title = International Directory of Company Histories, Vol. 52 | publisher = St. James Press | year = 2003 | chapter = Bear Stearns Companies, Inc.}}

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.{{cite news| url =https://www.reuters.com/article/us-bearstearns-jobs-idUSN2861070720071128| title =Bear Stearns to cut 650 jobs globally| author =Tim McLaughlin| work =Reuters| date =November 28, 2007| access-date =June 30, 2017| archive-date =September 24, 2015| archive-url =https://web.archive.org/web/20150924125334/http://www.reuters.com/article/2007/11/28/us-bearstearns-jobs-idUSN2861070720071128| url-status =live}} 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.{{cite news |url=https://money.cnn.com/magazines/fortune/mostadmired/2007/industries/industry_52.html |title=America's Most Admired Companies 2007 Fortune |work= CNN|access-date=August 23, 2011}} 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.

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,{{Cite news |url=https://money.cnn.com/2008/03/28/magazines/fortune/boyd_bear.fortune/ |author=Boyd, Roddy |title=The last days of Bear Stearns |work=Fortune |date=March 31, 2008 |url-status=dead |archive-url=https://web.archive.org/web/20080919002944/https://money.cnn.com/2008/03/28/magazines/fortune/boyd_bear.fortune/ |archive-date=September 19, 2008}} Retrieved on September 30, 2008. 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.

{{main|subprime mortgage crisis}}

{{See also|Subprime lending|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.{{cite magazine|last=Burrough |first=Bryan |url=http://www.vanityfair.com/politics/features/2008/08/bear_stearns200808 |title=Bringing Down Bear Stearns |magazine=Vanity Fair |access-date=June 19, 2013}}{{Citation |last1=Creswell |first1=Julie | last2 = Bajaj | first2 = Vikas |title=$3.2 Billion Move by Bear Stearns to Rescue Fund | newspaper =The New York Times |date=June 23, 2007 |url=https://archive.nytimes.com/www.nytimes.com/2007/06/23/business/23bond.html |access-date=February 15, 2025}} 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.{{Citation |last1=Siew |first1=Walden |last2=Yoon |first2=Al |title=Bear Stearns CDO liquidation sparks contagion fears |work=Reuters |date=June 21, 2007 |url=https://www.reuters.com/article/businesspro-usa-credit-bearstearns-cdo-d-idUSN2136425520070622 |access-date=June 30, 2017 |archive-date=October 6, 2014 |archive-url=https://web.archive.org/web/20141006171930/http://www.reuters.com/article/2007/06/22/businesspro-usa-credit-bearstearns-cdo-d-idUSN2136425520070622 |url-status=live}}{{cite web|last=Pittman|first=Mark|title=Bear Stearns Fund Collapse Sends Shock Through CDOs|date=June 21, 2007|url=https://www.bloomberg.com/apps/news?pid=20601087&sid=a7LCp2Acv2aw&refer=home|publisher=Bloomberg News|access-date=February 15, 2025|archive-url=http://web.archive.org/web/20070930041720/https://www.bloomberg.com/apps/news?pid=20601087&sid=a7LCp2Acv2aw&refer=home|archive-date=September 30, 2007|url-status=dead}} 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.{{Citation |last=Bajaj |first=Vikas |title=Bear Stearns Shakes Up Funds Unit | newspaper =The New York Times |date=June 30, 2007 |url=https://archive.nytimes.com/www.nytimes.com/2007/06/30/business/30bear.html |access-date=February 15, 2025}}

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.{{Citation |title=Bear Stearns Profit Plunges 61% on Subprime Woes |newspaper=The New York Times |date=September 21, 2007 |url=https://archive.nytimes.com/www.nytimes.com/2007/09/21/business/20cnd-wall.html |access-date=February 15, 2025 | first=Michael M. | last=Grynbaum}} With Samuel Molinaro's November 15th 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.{{Citation |last1=Basar |first1=Shanny | last2 = Ahuja| first2 = Vivek |title=Bear downgraded in face of first loss in 83 years | newspaper = Financial News Online |date=November 15, 2007 |url=http://www.efinancialnews.com/investmentbanking/content/2449185055/20755/ |access-date=April 16, 2008}}

Matthew Tannin and Ralph R. Cioffi, both former managers of hedge funds at Bear Stearns, were arrested June 19, 2008.{{Cite news| url = https://archive.nytimes.com/dealbook.nytimes.com/2008/06/19/behind-the-scenes-of-bears-fund-implosion/|title=Behind the Scenes of Bear's Fund Meltdown|department= DealBook|work=The New York Times |date = June 19, 2008|access-date=February 15, 2025}} 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 named in lawsuits brought by Barclays Bank, which claimed they were one of the many investors misled by the executives.{{cite news|last=Thomas|first=Landon Jr. |url=https://archive.nytimes.com/www.nytimes.com/2008/06/20/business/20bear.html |title= Prosecutors Build Bear Stearns Case on E-Mails |newspaper=The New York Times|date=June 20, 2008

|access-date=February 15, 2025}}{{cite web|last=Hays|first=Tom|url=https://news.yahoo.com/s/ap/20080619/ap_on_bi_ge/bear_stearns_investigation|title=2 charged on Wall Street in mortgage meltdown|publisher=Associated Press|archive-url=https://web.archive.org/web/20080620125236/http://news.yahoo.com/s/ap/20080619/ap_on_bi_ge/bear_stearns_investigation|archive-date=June 20, 2008|date=June 19, 2008|access-date=February 15, 2025|url-status=dead}}

They were also named in civil lawsuits brought in 2007 by investors, including Barclays, 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."{{cite web|url=http://hosted.ap.org/dynamic/stories/B/BEAR_STEARNS_INVESTIGATION?SITE=WBZAM&SECTION=HOME&TEMPLATE=DEFAULT|title=Ex-Bear Stearns managers arrested at their homes |last=Hays|first=Tom|archive-url= http://web.archive.org/web/20080619141549/http://hosted.ap.org:80/dynamic/stories/B/BEAR_STEARNS_INVESTIGATION?SITE=WBZAM&SECTION=HOME&TEMPLATE=DEFAULT|archive-date=June 19, 2008|access-date=February 15, 2025|url-status=dead}}

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.[https://www.pbs.org/wgbh/pages/frontline/video/flv/generic.html?s=frol02s1f81q752 Frontline: Inside the Meltdown – You Have a Weekend to Save Yourself] Retrieved February 26, 2009 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.{{cite web|last=Onaran|first=Yalman|url=https://www.bloomberg.com/apps/news?pid=20601087&refer=worldwide&sid=a7coicThgaEE|title=Fed Aided Bear Stearns as Firm Faced Chapter 11, Bernanke Says|publisher= Bloomberg News|date=April 2, 2008|archive-url=http://web.archive.org/web/20120418172124/http://www.bloomberg.com/apps/news?pid=newsarchive&refer=worldwide&sid=a7coicThgaEE|archive-date=April 18, 2012|access-date=February 15, 2025|url-status=dead}} 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.{{cite web|url=http://www.jpmorgan.com/cm/Satellite?c=JPM_Content_C&cid=1159339104093&pagename=JPM_redesign%2FJPM_Content_C%2FGeneric_Detail_Page_Template|archive-url=https://web.archive.org/web/20080326180008/http://www.jpmorgan.com/cm/Satellite?c=JPM_Content_C&cid=1159339104093&pagename=JPM_redesign%2FJPM_Content_C%2FGeneric_Detail_Page_Template|archive-date=March 26, 2008|title=JPMorgan Chase and Bear Stearns Announce Amended Agreement|date=March 24, 2008|publisher=JPMorgan Chase & Co.}} The structure of the transaction, with both loans collateralized by securitized home mortgages{{cite web|url=http://seekingalpha.com/article/70098-bear-stearns-bondholders-win-big |title=Bear Stearns Bondholders Win Big |publisher=Seeking Alpha |date=March 27, 2008 |access-date=June 19, 2013}} 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.{{cite web|url=http://hussmanfunds.com/wmc/wmc080324.htm |title=Weekly Market Comment: Why is Bear Stearns Trading at $6 Instead of $2 |publisher=Hussman Funds |date=March 24, 2008 |access-date=June 19, 2013}} Federal Reserve Chairman 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 US markets.{{cite news| url=https://www.cbsnews.com/news/bernanke-defends-bear-stearns-bailout/ | work=CBS News | title=Bernanke Defends Bear Stearns Bailout | date=April 3, 2008}}

On March 20, SEC 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' 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.{{Citation |title=Chairman Cox Letter To Basel Committee In Support Of New Guidance On Liquidity Management |date=March 20, 2008 |url=https://www.sec.gov/news/press/2008/2008-48_letter.pdf |access-date=April 16, 2008}}

On March 24, 2008, a class action suit was filed on behalf of shareholders, challenging the terms of JPMorgan's acquisition of Bear Stearns.{{Citation|title=C&T Files Complaint and Temporary Restraining Order Challenging Bear Stearns Buyout by JPMorgan |date=March 24, 2008 |url=http://www.chimicles.com/bearstearns/ |access-date=April 16, 2008 |url-status=dead |archive-url=https://web.archive.org/web/20080513013022/http://www.chimicles.com/bearstearns/ |archive-date=May 13, 2008}} 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.{{Cite news |last=Thomas |first=Landon Jr |last2=Dash |first2=Eric |date=March 25, 2008|title=Seeking Fast Deal, JPMorgan Quintuples Bear Stearns Bid |url=https://archive.nytimes.com/www.nytimes.com/2008/03/25/business/25bear.html |work=The New York Times |language=en-US |url-status=live|access-date=February 15, 2025 }} The revised deal was aimed to quiet upset investors and was necessitated by what was characterized as loophole in a guarantee that was open-ended, despite the fact that the deal required shareholder approval.{{Cite web|url=https://dealbreaker.com/2008/03/did-jp-morgan-understand-the-bear-stearns-guarantee |orig-date=Mar 24, 2008 |date=Jan 14, 2019 |title=Did JP Morgan Understand The Bear Stearns Guarantee?|last=Carney|first=John|website=Dealbreaker|language=en-us|access-date=September 22, 2019 |url-status=live |archive-url= https://archive.today/20240807233951/https://dealbreaker.com/2008/03/did-jp-morgan-understand-the-bear-stearns-guarantee |archive-date= 7 August 2024 }} 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.{{Cite web|url=https://www.adamsdrafting.com/drafting-errors-bear-stearns/ |first1= Ken |last1=Adams |title=Drafting Errors in the Bear Stearns Merger Agreement? What a Shock!|date=March 24, 2008|website=Adams on Contract Drafting|language=en-US|access-date=September 23, 2019}} The Bear Stearns bailout was seen as an extreme-case scenario, and continues to raise significant questions about Fed intervention. On April 8, 2008, former Fed chairman Paul Volcker stated that the Fed had 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.Niall Ferguson: The Ascent of Money: A Financial History of The World, Chapter 6: From Empire to Chimerica; Chimerica, p. 338 On May 29, Bear Stearns shareholders approved the sale to JPMorgan Chase at the $10-per-share price.{{Citation |last=White |first=Ben |title=Bear Stearns passes into Wall Street history |newspaper = Financial Times |date=May 29, 2008 |url=http://www.ft.com/cms/s/0/d42c01d2-2d8d-11dd-b92a-000077b07658.html}}

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.{{cite magazine | first=Matt | last=Taibbi |author-link= Matt Taibbi | title=Wall Street's Naked Swindle | date=October 2009 | url =https://www.rollingstone.com/politics/news/wall-streets-naked-swindle-20100405 | magazine =Rolling Stone | access-date = October 15, 2009}} 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."[http://www.cfr-cologne.de/download/workingpaper/cfr-09-09.pdf Naked Short Selling: The Emperor's New Clothes?] Centre for Financial Research, May 22, 2009. Time magazine also labelled former Bear Sterns head James Cayne as the CEO most responsible out of all the CEOs who "screwed up Wall Street" during the 2008 financial crisis, even reporting that "none seemed more asleep at the switch than Bear Stearns' Cayne."{{cite magazine|url=http://www.time.com/time/specials/packages/article/0,28804,1877351_1877350_1877327,00.html|title=25 People to Blame for the Financial Crisis|magazine=Time|accessdate=December 28, 2021|date=February 11, 2009 |url-status=unfit |archive-url=https://web.archive.org/web/20170819114637/http://content.time.com/time/specials/packages/article/0,28804,1877351_1877350_1877327,00.html|archive-date=August 19, 2017}}

• Salim L. Lewis: 1949–1978
• Alan C. Greenberg: 1978–1993
• James Cayne: 1993–2008
• Alan Schwartz: 2008

The largest Bear Stearns shareholders as of December 2007 were:{{Cite news |title=Employees lose $5bn on Bear Stearns | work = Financial News | author = Wright, William

|date=March 17, 2008 |url=http://www.efinancialnews.com/assetmanagement/pensionfunds/content/2450071941}} Retrieved on September 30, 2008.

• Barrow Hanley Mewhinney & Strauss – 9.73%
• Joseph C. Lewis – 9.36%
• Morgan Stanley – 5.37%
• James Cayne – 4.94%
• Legg Mason Capital Management – 4.84%
• Private Capital Management – 4.49%
• Barclays Global Investors – 3.10%
• State Street Global Advisors – 3.01%
• The Vanguard Group – 2.67%
• Janus Capital Management – 2.34%

{{Portal|New York City|Companies}}

• Primary dealer
• Bankruptcy of Lehman Brothers
• Irving Place Capital

{{Reflist|30em}}

• William Cohan, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, 2010.

• {{webarchive |url=https://web.archive.org/web/20080312203351/http://www.bearstearns.com/ |date=March 12, 2008 |title=Official site}}
• [https://www.pbs.org/wgbh/pages/frontline/meltdown/themes/bear.html Frontline: Inside the Meltdown Analysis—The Bear Stearns Rescue]
• [https://archive.nytimes.com/www.nytimes.com/imagepages/2008/03/17/business/20080317_BEAR_STEARNS_GRAPHIC.html The New York Times Timeline of Bear Stearns' history]

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