Bear Sterns Rise and Fall
The rise and fall of Bear Stearns
Introduction
Bear Stearns, the fifth largest investment bank in US, was established as an equity-trading house in 1923 by Joseph Bear, Robert Stearns, and Harold Mayer. Its headquarters was located in New York City with offices in the major US cities, South America, Europe, and Asia, employing more than 13,500 people around the world. The firm survived every major crisis like the Great Depression, World War II, the 1987 market crash, and the 9/11 terrorists attack and never had a losing quarter in its history until December 2007, when Bear Stearns announced the first loss for about $854 million.
1. Failure Analysis:
1.1. Major factors that contributed to Bear Stearns failure
After the 9/11 terrorist attacks, all the major bankers such as Lehman Brothers, Merrill Lynch, Morgan Stanley, and Bear Stearns wanted to capitalize on the mortgage boom that happened when the Federal Reserve loosened the money supply as part of its financial policy to try to solve the crisis. Bear Stearns began to be involved in securitization and issued lot amounts of mortgage-backed securities (MBS).
One of Bear Stearns profit centers was a small hedge fund division, ran it by Ralph R. Cioffi, that was part of the firm 's relatively small asset management business known as BSAM (Bear Stearns Asset Management). Cioffi raised two hedge funds, the Bear Stearns High-Grade Structured Credit Fund (using a 35x leverage) and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund (with a 100x leverage) that invested in risky collateralized debt obligations (CDOs). The collapse of these hedge funds, which filed for Chapter 15 bankruptcy on July 31, 2007 as a consequence of the subprime mortgage crisis, had insufficient credit insurance to protect against these losses in addition to the liquidity crisis product of the level of leverage employed in the financial strategy ($11.1 billion supported $395 billion in assets which means a
Introduction
Bear Stearns, the fifth largest investment bank in US, was established as an equity-trading house in 1923 by Joseph Bear, Robert Stearns, and Harold Mayer. Its headquarters was located in New York City with offices in the major US cities, South America, Europe, and Asia, employing more than 13,500 people around the world. The firm survived every major crisis like the Great Depression, World War II, the 1987 market crash, and the 9/11 terrorists attack and never had a losing quarter in its history until December 2007, when Bear Stearns announced the first loss for about $854 million.
1. Failure Analysis:
1.1. Major factors that contributed to Bear Stearns failure
After the 9/11 terrorist attacks, all the major bankers such as Lehman Brothers, Merrill Lynch, Morgan Stanley, and Bear Stearns wanted to capitalize on the mortgage boom that happened when the Federal Reserve loosened the money supply as part of its financial policy to try to solve the crisis. Bear Stearns began to be involved in securitization and issued lot amounts of mortgage-backed securities (MBS).
One of Bear Stearns profit centers was a small hedge fund division, ran it by Ralph R. Cioffi, that was part of the firm 's relatively small asset management business known as BSAM (Bear Stearns Asset Management). Cioffi raised two hedge funds, the Bear Stearns High-Grade Structured Credit Fund (using a 35x leverage) and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund (with a 100x leverage) that invested in risky collateralized debt obligations (CDOs). The collapse of these hedge funds, which filed for Chapter 15 bankruptcy on July 31, 2007 as a consequence of the subprime mortgage crisis, had insufficient credit insurance to protect against these losses in addition to the liquidity crisis product of the level of leverage employed in the financial strategy ($11.1 billion supported $395 billion in assets which means a