Bear Stearns Bailout

Topics: Subprime mortgage crisis, Federal Reserve System, Bear Stearns Pages: 6 (2153 words) Published: May 23, 2011
Bear Stearns Bailout
“The Fed did not bailout Bear at taxpayer expense, but enabled – as it is mandated – the financial markets to continue to function. History will call the Fed’s action the right move at the right time”, says Jeremy Siegel, Ph.D. The Bear Stearns Company began a financial meltdown in July 2007. By March 2008, it was ready to file Chapter 11 bankruptcy. Some people believe that the Federal Reserve should not have stepped in to bailout Bear Stearns because it was rewarding reckless business behavior and Bear should have been left to file bankruptcy. The deal of Bear Stearns was not a government bailout; it was rather a loan to preserve jobs, homes, savings, the economy, the shareholders of Bear, and the financial markets on Wall Street.

There are many aspects to the Bear Stearns financial problem. Bear Stearns, founded in 1923, is an investment bank that specialized in subprime mortgage loans. These loans are usually given to people who have a below average credit score and could not be financed elsewhere. In return, these loan recipients pay a higher mortgage interest rate (Siegel 1). Bear Stearns has over 14,000 employees in 34 branches in the United States and 14 international branches. As of November 2007, the company’s client account was $288.5 billion from providing trade and clearing services. In July 2007, two of Bear Stearns hedge funds that were invested in subprime mortgages began to fail, along with the housing market (Smith 1). Bear Stearns was facing bankruptcy and the economy was headed in a negative financial direction. The Bear Stearns problem coexists within their company and Wall Street. Bear Stearns began to break new ground in the 1980s housing market and was largely involved in the administering of subprime mortgages during the housing boom. The prices of these subprime mortage sececurities began to fall in 2007 when people could not longer afford to pay their mortgages, and Bear Stearns’ lenders began to demand more cash to secure their loans. When Bear Stearns knew they could not afford to cover the large margin of debt, they went to one of it’s lenders, JPMorgan (Siegel 1). If the Bear Stearns $8 billion company would have collapsed, the Wall Street financial market could have been in a financial crisis as well. The bankruptcy of Bear Stearns could have led to a total freeze on financial lending and caused an unknown amount of damage to the U.S. economy (The Ediorial Board 1-4). In 2007, Bear Stearn stocks were valued at $172 a share, but on March 14, the stock closed at $30 share. This $200 billion subprime mortgage crisis is just one of the numerous bailouts in the government’s history to protect homes, jobs, and savings when they fear the nation is facing economic disaster (Smith1).

The Bear Stearns crisis began in 2006 with the fall of home prices and has been getting worse since. This disaster has resulted in billions of dollars being taken from the value of the mortgage-backed securities held by banks and the investment value in homes (Smith 3). On June 14, 2007, Bear Stearns announced a 10% decline in quarterly earnings when the mortgage market started to show signs of decline. By June 18, 2007, Merrill Lynch seized collateral from the Bear Stearns hedge fund that was invested primarily in subprime loans. On November 14, 2007, Bear Stearns records a $1.62 bilion fourth quarter loss. By March 14, 2008, the Federal Reserves and JPMorgan Chase & Co. were bailing out Bear Stearns. The New York Federal Reserve made an emergency loan to JPMorgan of $30 billion for the purchase, and Bear Stearns stock plunged to $2 a share (The Associated Press 1). Under the revised terms of the agreement of the buyout, the Bear Stearns stock was exchanged for common stock in JPMorgan and raised in value to $10 a share. This was done in an attempt to satisfy all corporate stockholders (The Federal Reserve Bank 1).

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