March 16, 2008
Bear Stearns, a powerful Wall Street bank with 85 years of history, collapses and escapes bankruptcy only because it is sold to JP Morgan instead of the humiliating price of $ 2 per share.
With a market capitalization of $ 20 billion in early 2007, Bear Stearns seemed unstoppable. But the involvement of its hedge funds in the market for risky mortgages has led it to become one of the first victims of the mortgage crisis, which caused the global financial crisis and the Great Depression.
How the bubble burst
With real estate prices on the rise in the US, banks are beginning to lend to borrowers with very low creditworthiness. As the market gallops, Bear Stearns and other investment banks are aggressively entering the securitization of these subprime mortgages, ignoring the risks.
But after they peaked in mid-2006, house prices began to fall sharply and many of these borrowers stopped paying their loans. The lending companies are beginning to feel the crisis, with New Century Financial, which specializes in subprime mortgages, declaring bankruptcy in April 2007.
In June, Bear Stearns was forced to pay $ 3.2 billion to bail out the hedge fund of the High-Grade Structured-Credit Strategies Fund, which specializes in risky securities investments (CDOs).
The following month, the bank reveals that High-Grade and another hedge fund have lost almost all of their value due to the sharp drop in the subprimes market.
The Fall of the Bear
Bear Stearns is showing losses for the fourth quarter of 2007, for the first time in 80 years and its CEO, Jimmy Kane, is forced to leave. Alan Schwartz succeeds him in January 2008.
After two months, Bear Stearns collapses in a few days. It all started on March 11, when the Federal Reserve announced a $ 50 billion funding line to help troubled banks. On the same day, Moody’s downgraded many of Bear Stearns’s securities to junk.
These developments undermine the market confidence in Bear Stearns, with the result that investors refuse to finance it through repo. As of March 13, Bear has liquidity below $ 3 billion, which means it may not be operational the next day.
Schwartz calls JP Morgan and the Federal Reserve and asks for an emergency loan. And while JP Morgan has agreed to give it to her, the Bear Stearns share sinks the next day.
As of Saturday, JP Morgan concludes that Bear Stearns is worth just $ 236 million. Fearing that the fall of Bear will sweep across Wall Street, the Fed is holding an emergency meeting. Until the evening of Sunday, March 16, the BoD Bear has agreed to sell the bank to JP Morgan for $ 2 a share, down 93% from Friday’s close (subsequent trading will raise the final price to $ 10 a share).
Eventually, the deal turned out to be a headache for JP Morgan, which paid billions of dollars in mortgage-related settlements over Bear Stearns and the Washington Mutual, which it also “rescued” in the crisis. JP Morgan CEO Jamie Dimon has said he would not do it again.
Bear Stearns would go down in history as one of the first domino pieces to fall into the global financial crisis that caused a global recession and changed the image of Wall Street. Six months later, Lehman Brothers went bankrupt, Merrill Lynch was absorbed by Bank of America, and the largest US banks were rescued by the government.
The CEO who played cards and golf in times of crisis
Bear Stearns CEO Jimmy Kane would become one of the negative protagonists of the global financial crisis.
Kane became a symbol of all the evils that drove the global financial system to collapse when the investment bank he ran since 1993 (he was Wall Street’s longest-serving CEO) knelt under the weight of huge debts and trading losses.
By the time his bank collapsed, Jimmy Kane was absent from his office for long periods of time, either playing golf or participating in bridge games.
It was the pressure of his absence at a time when Bear Stearns’s share price – and under the weight of reports that wanted him to use marijuana, which he himself denied – that forced Kane to take over as CEO. to Alan Schwartz.
Jimmy Kane, a fierce, competitive banker who smoked cigars and frantically played bridge, was the archetype of the now-defunct Wall Street boss. She once told a colleague after meeting her son: “This child has a bad handshake. “He will not go anywhere in his life.”
Although other bankers who left Wall Street badly during the crisis returned with new funds in their careers, Kane never did. Instead, he returned to his first love, the bridge.
When reporters asked for a comment from his wife of 50 years, Patricia Kane, on the 10th anniversary of the 2008 crisis, she told them: “He has retired and is doing what he loves most of all. Basically, it was the second thing. “Bear was the first.”
He died at the age of 87 a few months ago.
Money Review
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