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Bear Stearns

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Bear Stearns
Company typePublic NYSE: BSC
IndustryInvestment services
Founded1923
Headquarters New York City, USA
Key people
Alan Schwartz, CEO
ProductsFinancial Services
Investment Banking
Investment Management
RevenueDecrease US$16.151 billion (11/2007)
Decrease US$ 233 million (11/2007)[1]
Number of employees
13,566 (11/2006)
Website[1]

The Bear Stearns Companies, Inc. (NYSE: BSC) is the parent company of Bear, Stearns & Co. Inc., which was one of the largest global investment banks and securities trading and brokerage firms in the world. The firm's main businesses included capital markets (equities and fixed income), investment banking, wealth management, and prime brokerage clearing services.

Following a March 14, 2008, announcement that the firm required emergency financing from the Federal Reserve Bank of New York and JPMorgan Chase in order to avoid insolvency, Bear Stearns stock price suffered a precipitous decline, with its market capitalization dropping by 47%, from $57 per share to $30 per share by the end of the day. On March 16, the firm agreed to be acquired by JPMorgan Chase for $236 million (approximately $2 per share).[2] Among Bear Stearns' assets most desired by JPMorgan are its prime brokerage unit and the firm's midtown Manhattan office tower.[3]

History

Bear Stearns world headquarters

Bear Stearns was founded as an equity trading house in 1923 by Joseph Bear, Robert Stearns, and Harold Mayer with $500,000 in capital.[4] The firm survived the stock market crash of 1929 without laying off any employees and by 1933 opened its first branch office in Chicago.[4]In 1955, the firm opened its first international office in Amsterdam.[4] In 1985, Bear Stearns became a publicly traded company.[4]

In 1978, Alan "Ace" Greenberg became the chief executive and chairman of the board, positions he would hold for nearly two decades. Greenberg was legendary figure in the Wall Street community, and become known for his memos to the staff, which famously included exhortations to cut costs by re-using paper clips and fixing broken rubber bands.

Ultimately, Bear Stearns evolved into a full service investment bank, with a client list that included corporations, institutions, governments, and individuals. From world headquarters located at 383 Madison Avenue, between E. 46th Street and E. 47th Street in Manhattan, the company currently employs more than 15,500 people worldwide, 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 has offices in London, Beijing, Dublin, Hong Kong, Lugano, Milan, São Paulo, Shanghai, Singapore, and Tokyo.

The company's business includes corporate finance, mergers and acquisitions, institutional equities and fixed income sales, 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 offers global clearing services to broker dealers, prime broker clients and other professional traders, including securities lending. Bear Stearns is 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".

From 2005 through 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 ranking of employee talent, quality of management and business innovation. This marks the second time in the past three years that Bear Stearns has achieved this top distinction. However, by mid-March 2008, Bear Stearn's share price reached a ten year low (losing 80% of its stock value) resulting from troubles related to the U.S. subprime mortgage market crisis. This reflected liquidity concerns, which culminated in an announcement of emergency funding from the Federal Reserve and a subsequent buyout by JPMorgan Chase & Co..

Subprime mortgage hedge fund crisis

Main article: Subprime mortgage 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.[5] The funds were invested in thinly traded collateralized debt obligations found to be worth (that is, have a fair market value) less than the mark-to-model value that Bear had been reporting. Merrill Lynch seized $850 million worth of the underlying collateral but was only able to auction $100 million of them. The incident sparked concern of contagion as Bear Stearns may be forced to liquidate its CDOs, prompting a mark-down of similar assets in other portfolios.[6][7] 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.[8]

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 (the funds' extreme leverage magnified their losses).

On August 1, 2007, investors in the two funds took action against Bear Stearns and its top management. 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.[9] Co-President Warren Spector was forced to resign on August 5, 2007, as a result of errant trades that led to the collapse of two hedge funds backed primarily by subprime loans. 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 were writing down a further $1.2 billion in mortgage-related securities and would face their first loss in 83 years, Standard & Poor's downgraded their credit rating from AA to A.[11]

JPMorgan Chase takeover

On March 10, 2008, Bear Stearns denied market rumors that it had developed cash liquidity problems[12] - while Chairman James Cayne participated in a bridge tournament[13]. Yet, on March 14, 2008, the Associated Press reported that JPMorgan Chase, in conjunction with the Federal Reserve Bank of New York, would provide temporary funding because "its liquidity significantly deteriorated over the past day and the temporary funding will help it continue operating normally."[14] The article further quoted Bear Stearns as indicating "there is no guarantee any permanent strategic alternatives will be successful." JPMorgan Chase will provide funding as necessary for up to 28 days and will also assist Bear Stearns in finding permanent financing.

Market reaction to the arrangement with JPMorgan Chase was extremely negative with Bear Stearns stock down more than 91% over the next two trading sessions. This led some market observers to question whether Bear Stearns could remain an independent bank.[15] Standard & Poor's lowered the counterparty risk rating of Bear Stearns three notches to "BBB" from "A" and warned that other cuts may be warranted. While S&P expected Bear Stearns will solve its funding problems, they warned, "...we consider it [the arrangement with JPMorgan Chase] a short term solution to a longer term issue that does not entirely affect Bear's confidence crisis."[16]

On March 16, 2008, JP Morgan Chase Bank announced plans to purchase the troubled organization for approximately $2 per share or approximately $240 million.[17] The exact terms of the transaction are JPMorgan Chase will exchange 0.05473 shares of its stock for each share of Bear Stearns. To illustrate the severity of Bear's financial condition, the sale price is only 2.4% of the bank's book value and only 1% of its market value only 16 days prior to the sale. The real estate value of the bank's Manhattan headquarters alone is about $1.2 billion. This implies that some of Bear's businesses are worthless or generate outsized losses.[18]

Additionally, in a rare move, the Federal Reserve agreed to fund up to $30 billion of Bear's less liquid assets. It is thought that there will be mass layoffs at Bear Stearns entities.[19] The transaction is a fast-track deal, that has already received the approval of both boards. JPMorgan is expected to close its purchase by the end of June 2008, pending shareholder approval.[20]

This action by JPMorgan Chase further underscores the magnitude and severity of the credit crisis in the United States. David Goldman, former head of debt research at Bank of America, stated that "for Bear's stock price to go to effectively zero, contrary to market expectations, tells us that something is systemically very wrong and we're at a very dangerous moment."[18]

Joe Lewis, the single largest individual investor, called the acquisition "derisory" and hinted the deal will not be consumated. (Joe Lewis on December of 2007 had risen a stake at the brokerage firm to 9.4%, a total of 11 million shares, for which he paid an average price of $107 apiece. Lewis lost about $1.16 billion of his investment when on March 16, 2008 Bear Stearns was purchased in a straight stock swap with JP Morgan Chase in which JP Morgan paid the equivalent of $2.00 a share for Bear Stearns.)

Subsidiaries

Bear Stearns also conducts business through other wholly owned subsidiaries, including:

  • Bear Energy LP,
  • Bear Stearns & Co. Inc. (Consolidated),
  • Bear Stearns Asset Management Inc,
  • Bear Stearns Bank PLC,
  • Bear Stearns Capital Markets Inc.,
  • Bear Stearns Commercial Mortgage, Inc.,
  • Bear Stearns Credit Products Inc.,
  • Bear Stearns Financial Products Inc.,
  • Bear Stearns Forex Inc.,
  • Bear Stearns Global Lending Limited,
  • Bear Stearns International Limited,
  • Bear Stearns International Trading Limited,
  • Bear Stearns Investment Products Inc.,
  • Bear Stearns Mortgage Capital Corporation,
  • Bear Stearns Securities Corporation (BSSC, formed July 1991),
  • Bear Wagner,
  • Custodial Trust Company,
  • EMC Mortgage Corporation, and
  • Rooftop Mortgages.


Bear Stearns also holds an 80% interest in Bear Measurisk.

Major shareholders

The largest Bear Stearns shareholders as of September 2007 were:[21]

  • Joseph C. Lewis with 8.1 million shares, about 7% of the company
  • Putnam Investment Management (largest institutional shareholder) with 7.03 million shares, about 6% of the company
  • James Cayne, Bear Stearns Chairman, owned about 5.8% of the company

Notable former employees

Business

Politics and public service

Other

See also

References

  1. ^ Kelly, Kate (2007-12-21). "Bear's Woe: Beyond Mortgages". The Wall Street Journal. Retrieved 2007-12-22. {{cite news}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  2. ^ "J.P. Morgan to Buy Bear Stearns url=http://online.wsj.com/article/SB120569598608739825.html?mod=hps_us_whats_news". Wall Street Journal. 16 March 2009. {{cite news}}: |access-date= requires |url= (help); Italic or bold markup not allowed in: |publisher= (help); Missing pipe in: |title= (help); line feed character in |title= at position 32 (help)
  3. ^ "J.P. Morgan to Buy Bear Stearns url=http://online.wsj.com/article/SB120569598608739825.html?mod=hps_us_whats_news". Wall Street Journal. 16 March 2009. {{cite news}}: |access-date= requires |url= (help); Italic or bold markup not allowed in: |publisher= (help); Missing pipe in: |title= (help); line feed character in |title= at position 32 (help)
  4. ^ a b c d "Could Bear Stearns Do Better? url=http://www.nytimes.com/2008/03/17/business/17dealbook-could-be21779.html". The New York Times. 17 March 2008. {{cite news}}: |access-date= requires |url= (help); Check date values in: |accessdate= (help); Italic or bold markup not allowed in: |publisher= (help); Missing pipe in: |title= (help); line feed character in |title= at position 30 (help)
  5. ^ Creswell, Julie; Bajaj, Vikas (2007-06-23), "$3.2 Billion Move by Bear Stearns to Rescue Fund", New York Times{{citation}}: CS1 maint: date and year (link)
  6. ^ Siew, Walden; Yoon, Al (2007-06-21), "Bear Stearns CDO liquidation sparks contagion fears", Reuters{{citation}}: CS1 maint: date and year (link)
  7. ^ Pittman, Mark (2007-06-21), "Bear Stearns Fund Collapse Sends Shock Through CDOs", Bloomberg{{citation}}: CS1 maint: date and year (link)
  8. ^ Bajaj, Vikas (2007-06-30), "Bear Stearns Shakes Up Funds Unit", New York Times{{citation}}: CS1 maint: date and year (link)
  9. ^ Herron, Jeremy (2007-08-01), "Fund Investors Launch Bear Claims", Associated Press{{citation}}: CS1 maint: date and year (link)
  10. ^ Eric Dash and Landon Thomas Jr. (2007-09-21). "Credit Turmoil Bruised Most on Wall Street, but Pain Was Not Shared Equally". New York Times. Retrieved 2008-03-15.
  11. ^ Basar, Shanny; Ahuja, Vivek (2007-11-15), "Bear downgraded in face of first loss in 83 years", Financial News Online{{citation}}: CS1 maint: date and year (link)
  12. ^ "Bear Stearns Denies Liquidity Rumors", Bear Stearns Press Release, 2008-03-10{{citation}}: CS1 maint: date and year (link)
  13. ^ "Bear Stearns Chairman Played Cards Amid Crisis-WSJ", Reuters.com
  14. ^ "JPMorgan Chase Funding Bear Stearns", Associated Press, 2008-03-14{{citation}}: CS1 maint: date and year (link)
  15. ^ "JPMorgan and Fed Move to Bail Out Bear Stearns", The New York Times, 2008-03-14{{citation}}: CS1 maint: date and year (link)
  16. ^ "S&P cuts Bear Stearns On Cash Crunch, May Cut Again", Reuters, 2008-03-14{{citation}}: CS1 maint: date and year (link)
  17. ^ "JPMorgan pays $2 a Share for Bear Stearns", The New York Times, 2008-03-17{{citation}}: CS1 maint: date and year (link)
  18. ^ a b "JPMorgan agrees to Buy Bear Stearns for $240 Million", Bloomberg News, 2008-03-17{{citation}}: CS1 maint: date and year (link)
  19. ^ J.P. Morgan to Buy Bear Stearns, 2008-03-16{{citation}}: CS1 maint: date and year (link)
  20. ^ "JPMorgan acquires troubled Bear". CNN Money.com. 16 March 2009. Retrieved 2008-03-16. {{cite news}}: Italic or bold markup not allowed in: |publisher= (help)
  21. ^ "Billionaire Buys Big Stake in Bear Stearns", New York Times, 2007-09-11{{citation}}: CS1 maint: date and year (link)


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