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Bear_Stearns

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									From Wikipedia, the free encyclopedia

Bear Stearns

Bear Stearns
Bear Stearns

The collapse of the company was a key prelude event to the risk management meltdown of the Wall Street investment bank industry in September 2008, and the subsequent global financial crisis and recession.

Type Founded Headquarters Key people

Subsidiary of JPMorgan Chase 1923 New York City, New York USA Alan Schwartz, former CEO James Cayne, former Chairman & CEO Investment services Financial services Investment banking Investment management 13,566 (11/2006)

Overview

Industry Products

Employees

The Bear Stearns Companies, Inc. (former New York Stock Exchange ticker symbol BSC) based in New York City, was once known for its top risk management talent and was one of the largest global investment banks and securities trading and brokerage firms prior to its sudden collapse and distress sale to JPMorgan Chase in March 2008. The main business areas, based on 2006 net revenue distributions, were: capital markets (equities, fixed income, investment banking; just under 80%), wealth management (under 10%) and global clearing services (12%). Bear Stearns pioneered the securitization and asset-backed securities markets, and as investor losses mounted in those markets in 2006 and 2007, the company actually increased its exposure, especially the mortgage-backed assets that were central to the subprime mortgage crisis. In March 2008, the Federal Reserve Bank of New York provided an emergency loan to try to avert a sudden collapse of the company. The company could not be saved, however, and was sold to JPMorgan Chase for as low as ten dollars per share, a price far below the 52-week high of $133.20 per share, traded before the crisis, although not as low as the two dollars per share originally agreed upon by Bear Stearns and JP Morgan Chase.[1]

Bear Stearns’ former offices at 383 Madison Avenue Bear Stearns was founded as an equity trading house in 1923 by Joseph Bear, Robert Stearns, and Harold Mayer with $500,000 in capital.[2]. Internal tensions quickly arose between the three founders. The firm survived the Wall Street Crash of 1929 without laying off any employees and by 1933 opened its first branch office in Chicago.[2] In 1955, the firm opened its first international office in Amsterdam.[2] In 1985, Bear Stearns became a publicly traded company.[2] It served corporations, institutions, governments and individuals. The company’s business included corporate finance, mergers and acquisitions, institutional equities, fixed income sales &

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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.[3] Bear Stearns was also known for one of the most widely read market intelligence pieces on the street, known as the "Early Look at the Market - Bear Stearns Morning View". Bear Stearns’ World Headquarters was located at 383 Madison Avenue, between East 46th Street and East 47th Street in Manhattan. The company employed more than 15,500 people worldwide. The firm was headquartered in New York City with offices in Atlanta, Boston, Chicago, Dallas, Denver, Houston, Los Angeles, Irvine, San Francisco, San Juan, Whippany, New Jersey, and St. Louis. 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 security firm section. 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. On March 17, 2008, JP Morgan Chase offered to acquire Bear Stearns at a price of $236 million, or $2 per share. On March 24, 2008, that offer was raised to $1.1 billion or $10 per share in an effort to pacify angry shareholders. JPMorgan Chase completed its acquisition of Bear Stearns on May 30, 2008 at the renegotiated price of $10 per share.

Bear Stearns
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,[4] which means a leverage ratio of 35.5 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.

Subprime mortgage hedge fund crisis
See also: Subprime lending and 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 $35 million, so they were hesitant about the bailout, however CEO James Cayne and other senior executives worried about the damage to the company’s reputation.[5][6] The funds were invested in thinly traded collateralized debt obligations (CDOs) found to be worth less than their mark-to-market value. 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.[7][8] 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.[9] 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.

Financials
As of November 30, 2006, the company had total capital of approximately $66.7 billion and total assets of $350.4 billion. According to the April 2005 issue of Institutional Investor magazine, Bear Stearns was the seventh-largest securities firm in terms of total capital. As of November 30, 2007 Bear Stearns had notional contract amounts of approximately $13.40 trillion in derivative financial

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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, though there have been several others since then. Co-President Warren Spector was asked to resign on August 5, 2007, as a result of an ongoing conflict with Cayne. Spector, considered the apparent heir to become CEO, was blamed by Cayne for the failure of the hedge funds. 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.[10] With Samuel Molinaro’s November 15 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.[11] Matthew Tannin and Ralph R. Cioffi, both former managers of hedge funds at Bear Stearns Companies, were arrested June 19, 2008. They are facing criminal charges and are suspected of misleading investors about the risks involved in the subprime market. Tannin and Cioffi have also been named in lawsuits brought forth by Barclays Bank, who claims they were one of the many investors misled by the executives.[12][13] They were also named in civil lawsuits brought in 2007 by investors, including Barclays Bank PLC, 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."[14]

Bear Stearns

Fed bailout and sale to JPMorgan Chase
On March 14, 2008, JP Morgan Chase, in conjunction with the Federal Reserve Bank of New York, provided a 28-day emergency loan to Bear Stearns in order to prevent the potential market crash that would result from Bear Stearns becoming insolvent.[15] Despite, or because of, this, belief in Bear’s ability to repay its obligations rapidly diminished among counterparties and traders. Seeing that the emergency loan was not enough to bolster Bear Stearns, and worried that a stillfloundering Bear would result in systemic losses if allowed to open in the markets on the following Monday, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson Jr. told CEO Alan Schwartz that he had to sell the firm over the weekend, in time for the opening of the Asian market. [16]Two days later, on March 16, 2008, Bear Stearns signed a merger agreement with JP Morgan Chase in a stock swap worth $2 a share or less than 10 percent of Bear Stearns’ market value.[17] This sale price represented a staggering loss as its stock had once traded at $172 a share as late as January 2007, and $93 a share as late as February 2008. In addition, the Federal Reserve agreed to issue a non-recourse loan of $29 billion to JP Morgan Chase,[18] thereby assuming the risk of Bear Stearns’s less liquid assets (see Maiden Lane LLC). This non-recourse loan means that the loan is collateralized by mortgage debt[19] and that the government can not seize J.P. Morgan Chase’s assets if the mortgage debt collateral becomes insufficient to repay the loan.[19][20] Chairman of the Fed, Ben Bernanke, defended the bailout by stating that a Bear Stearns’ bankruptcy would have affected the real economy[21] and could have caused a "chaotic unwinding" of investments across the US markets.[17] On March 20, Securities and Exchange Commission 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’s 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

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From Wikipedia, the free encyclopedia
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 selffulfilling, Cox said.[22] On March 24, 2008, a class action lawsuit was filed on behalf of shareholders, challenging the terms of JPMorgan’s recently announced acquisition of Bear Stearns.[23] That same day, a new agreement was reached that raised JPMorgan Chase’s offer to $10 a share, up from the initial $2 offer, that meant an offer of $1.2 billion.[24] The revised deal was aimed to quiet upset investors and any subsequent legal action brought against JP Morgan Chase as a result of the deal as well as to prevent employees, many of whose past compensation consisted of Bear Stearns stock, from leaving for other firms. The Bear Stearns bailout was seen as an extreme-case scenario, and continues to raise significant questions about Fed intervention. On May 29, Bear Stearns shareholders approved the sale to JPMorgan Chase at the $10-per-share price.[25]

Bear Stearns
companies with a focus on the biotechnology sector[35] • Constellation Ventures a venture capital group, founded in 1998, making investments in the media, communications, software and services sectors[36]

Major shareholders
The largest Bear Stearns shareholders as of December 2007 were:[37] • 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 - 4.69% • Barclays Global Investors - 3.60% • State Street 3.01% • Vanguard Group - 2.67% • Janus Capital Management - 2.34% • Legg Mason Funds Management - 1.95% • Fidelity Management- 1.93% • Putnam Investment Management - 1.90% • Neuberger Berman - 1.55% • UBS - 1.54%

Bear Stearns Merchant Banking
As part of the acquisition of Bear Stearns, JPMorgan Chase acquired several private equity groups within Bear Stearns Asset Management, including: • Bear Stearns Merchant Banking, a $4.4 billion private equity business founded in 1997. In June 2008, it was announced BSMB would spin out of J.P. Morgan[26][27][28] and in November 2008, the firm relaunched as Irving Place Capital.[29][30] • Bear Growth Capital Partners, a growth capital investment group founded in 2003 with a $375 million commitment from Bear Stearns.[31][32] J.P. Morgan hired CCMP Capital to manage the legacy fund[33] • Bear Stearns Private Equity Ltd., renamed J.P. Morgan Private Equity Limited (LSE: JPEL), a publicly traded private equity vehicle making fund of funds and secondary investments[34] • Bear Stearns Health Innoventures, a venture capital fund established to invest in early- to mid-stage health care focused

See also
• • • • Primary dealers Bankruptcy of Lehman Brothers Lehman Brothers Bear Stearns Merchant Banking

References
[1] Ross, Andrew (March 17, 2008). "JP Morgan Pays $2 a Share for Bear Stearns". The New York Times. http://www.nytimes.com/2008/03/17/ business/17bear.html. Retrieved on September 30, 2008. [2] ^ "Could Bear Stearns Do Better?". The New York Times. 2008-03-17. http://www.nytimes.com/2008/03/17/ business/17dealbook-couldbe21779.html. Retrieved on 2008-03-17. [3] "Bear Stearns Companies, Inc.". International Directory of Company Histories, Vol. 52. St. James Press. 2003. [4] Boyd, Roddy (March 31, 2008). "The last days of Bear Stearns". Fortune. http://money.cnn.com/2008/03/28/

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From Wikipedia, the free encyclopedia

Bear Stearns

magazines/fortune/boyd_bear.fortune/. [16] FRONTLINE: Inside the Meltdown - You Retrieved on September 30, 2008. Have a Weekend to Save Yourself [5] [1] Retrieved Feb. 26, 2009 [6] Creswell, Julie; Bajaj, Vikas (2007-06-23), [17] ^ Fed Aided Bear Stearns as Firm Faced "$3.2 Billion Move by Bear Stearns to Chapter 11, Bernanke Says. Bloomberg, Rescue Fund", New York Times, April 2, 2008 http://www.nytimes.com/2007/06/23/ [18] http://www.jpmorgan.com/cm/ business/23bond.html, retrieved on Satellite?c=JPM_Content_C&cid=1159339104093&p 2008-04-16 [19] ^ http://seekingalpha.com/article/ [7] Siew, Walden; Yoon, Al (2007-06-21), 70098-bear-stearns-bondholders-win-big "Bear Stearns CDO liquidation sparks [20] http://hussmanfunds.com/wmc/ contagion fears", Reuters, wmc080324.htm http://yahoo.reuters.com/news/ [21] http://www.cbsnews.com/stories/2008/ articlehybrid.aspx?storyID=urn:newsml:reuters.com:20070621:MTFH14355_2007-06-21_17-34-09_N2 04/03/business/ [8] Pittman, Mark (2007-06-21), "Bear main3991713.shtml?source=RSSattr=HOME_39917 Stearns Fund Collapse Sends Shock [22] (PDF) Chairman Cox Letter To Basel Through CDOs", Bloomberg, Committee In Support Of New Guidance http://www.bloomberg.com/apps/ On Liquidity Management, 2008-03-20, news?pid=20601087&sid=a7LCp2Acv2aw&refer=home, http://www.sec.gov/news/press/2008/ retrieved on 2008-04-16 2008-48_letter.pdf, retrieved on [9] Bajaj, Vikas (2007-06-30), "Bear Stearns 2008-04-16 Shakes Up Funds Unit", New York [23] C&T Files Complaint and Temporary Times, http://www.nytimes.com/2007/06/ Restraining Order Challenging Bear 30/business/30bear.html?ref=business, Stearns Buyout by JPMorgan, retrieved on 2008-04-16 2008-03-24, http://www.chimicles.com/ [10] "Bear Stearns Profit Plunges 61% on bearstearns/, retrieved on 2008-04-16 Subprime Woes", New York Times, [24] Seeking Fast Deal, JPMorgan Quintuples 2007-09-21, http://www.nytimes.com/ Bear Stearns Bid. New York Times, 2007/09/21/business/20cnd-wall.html, March 25, 2008 retrieved on 2008-09-14 [25] White, Ben (May 29), "Bear Stearns [11] Basar, Shanny; Ahuja, Vivek passes into Wall Street history", (2007-11-15), "Bear downgraded in face Financial Times, http://www.ft.com/cms/ of first loss in 83 years", Financial News s/0/d42c01d2-2d8d-11ddOnline, http://www.efinancialnews.com/ b92a-000077b07658.html investmentbanking/content/2449185055/ [26] Bear Buyout Arm Ready to Fly Solo: 20755/, retrieved on 2008-04-16 BSMB to Split Off In Tale of Survival; [12] Associated Press (2008-06-19). ""2 First Up: New Name. Wall Street Former Bear Stearns Managers Journal, June 5, 2008 Arrested"". NY Times. [27] http://blogs.wsj.com/deals/2008/03/18/ http://www.nytimes.com/2008/06/20/ what-happens-to-bear-stearns-merchantbusiness/ banking-arm/ What Happens to Bear 20bear.html?_r=1&hp&oref=slogin. Stearns Merchant Banking arm. Wall Retrieved on 2008-06-19. Street Journal: Deal Journal, March 18, [13] Charges at Bear Stearns linked to 2008 subprime debacle By TOM HAYS, [28] What now for Bear Stearns’ PE, VC Associated Press Writer, 6/19/08. affiliates?. The Deal, March 17, 2008 [14] Ex-Bear Stearns managers arrested at [29] BSMB is Now Irving Place. Private their homes By Tom Hays, Associated Equity Professional Digest, October 29, Press, 6/19/08. 2008 [15] "JPMorgan Chase Funding Bear Stearns" [30] Bear Stearns Merchant Banking ( – Scholar search), Associated Press, rebrands . Private Equity Online, 2008-03-14, http://biz.yahoo.com/ap/ October 28, 2008 080314/bear_stearns.html, retrieved on [31] Bear Merchant Banking Continues To Do 2008-04-16 Deals. Reuters Buyouts, March 31, 2008 [32] Growth Capital Partners’ Paul Lattanzio finds gold in hidden places — and isn’t

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From Wikipedia, the free encyclopedia
afraid to hold onto it. Dealmaker May/ June 2007 , Page 62 [33] PE Week Wire: Tuesday, December 16, 2008. Reuters, December 16, 2008 [34] Bear Stearns Private Equity Limited Changes Name to J.P. Morgan Private Equity Limited. Press Release. J.P. Morgan Private Equity Limited (company website) [35] Bear Stearns Health Innoventures Closes $212 Million Fund. Business Wire, April 26, 2001 [36] Constellation Ventures (company website)

Bear Stearns
[37] Wright, William (March 17, 2008). "Employees lose $5bn on Bear Stearns". Financial News. http://www.efinancialnews.com/ assetmanagement/pensionfunds/content/ 2450071941. Retrieved on September 30, 2008.

External links
• Bear Stearns home page • FRONTLINE: Inside the Meltdown Analysis- The Bear Stearns Rescue

Retrieved from "http://en.wikipedia.org/wiki/Bear_Stearns" Categories: JPMorgan Chase, Companies based in New York City, Companies established in 1923, Financial crises, Investment management companies of the United States, Former investment banks, Entities involved in United States housing bubble, 2000s economic history This page was last modified on 14 May 2009, at 02:39 (UTC). All text is available under the terms of the GNU Free Documentation License. (See Copyrights for details.) Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a U.S. registered 501(c)(3) taxdeductible nonprofit charity. Privacy policy About Wikipedia Disclaimers

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