Bear Stearns

Definition

The Bear Sterns was a New York City based global investment bank and financial company that collapsed in 2008 during the subprime mortgage crisis. The company was founded in 1923 and lasted for eighty-five years until its collapse in 2008. Until its collapse, Bear Stearns became one of the largest investment banks and a global bank after it survived the 1929 stock market crash (the great depression).

The Collapse of Bear Stearns

In 2006 alone, it generated a $9 billion worth of revenue, earned $2 worth of profits, and had an employee strength of over 12,800 globally. As of 2007, its figures increased as it had a stock market capitalization of $20 billion. By 2008, everything came crumbling down as a result of what may seem to be “greedy” decisions when it tried to venture into the hedge fund business. The firm which endured the great depression started the great recession—the 2008 financial crisis.

By April 2007 bond dealers advised two of the managers of Bear Stearns to write down the value of their assets after the housing market lost its grip on the financial system. At the time, the subprime mortgage crisis had only begun. The first crisis instance was in September 2006 by then the prices of housing began to fall. A month shortly after Bear Stearns was asked to write down the value of its assets, the Enhanced Leverage Fund also announced a 6.75% asset loss. Only to announce an 18% loss after two weeks. This announcement caused many investors to pull out their money with the fund’s bankers calling in their loans. As a result of this, Bear Stearns (parent company) had to cover (internal bailout) for this hedge fund loss by selling about $3.5 worth of its assets.

The collapse of the housing market affected the whole financial system as it was unexpected and a good percentage of the system was laid on the foundation of the housing market. Bear Stearns was greatly affected by this unfortunate occurrence, however, the losses were manageable and its market cap increased to $20 billion by the close of 2007.

The market seemed to be “too hot” for Bear Stearns in 2008 as its mortgage-backed securities and holdings were gradually downgraded leaving the firm with quite a number of illiquid assets in a down market. Within the first quarter of 2008, the firm was out of funds and applied for a Federal Reserve credit guarantee through the Term Securities Lending Facility in March 2008. Shortly after that, another downgrade struck the firm, and by 13th March 2008, it was officially broke.