Everything about Bear Stearns totally explained
The Bear Stearns Companies, Inc. is the parent company of
Bear, Stearns & Co. Inc., one of the largest global
investment banks and
securities trading and
brokerage firms in the world. The main business areas, based on 2006 net revenue distributions, are:
capital markets (equities, fixed income, investment banking; just under 80%),
wealth management (under 10%) and global
clearing services (12%).
On
March 16,
2008, under the supervision of the
Federal Reserve, the company signed a merger agreement with
JP Morgan Chase under which JPMorgan Chase would assume the counterparty risk and exercise management control over Bear Stearns pending shareholder approval. The Federal Reserve issued a
non-recourse loan of $30 billion in order to cover losses in Bear Stearns' investments in mortgage-backed securities and exotic investment paper, with collateral to be managed by
BlackRock. Federal Reserve Chairman Ben S. Bernanke testified before the Joint Economic Committee of the U.S. Congress that there most likely would have been "severe consequences" to the default of Bear Stearns, leading to a possible systemic financial crisis. Many viewed the Federal Reserve's actions as a government bailout of an investment bank. One week later, JP Morgan Chase increased the value of its purchase
stock swap from $2.00/share to $10.00/share and reduced the loan from the Fed by $1 billion. At its peak in January 2007, each share was valued at $171.52.
Overview
The company was founded in 1923 by Joseph Bear,
Robert Stearns, and
Harold Mayer as an equity trading house. It serves corporations, institutions, governments and individuals. 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."
Bear Stearns' World Headquarters is 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. The firm is headquartered in
New York City with offices in
Atlanta,
Boston,
Chicago,
Dallas,
Denver,
Houston,
Los Angeles,
Irvine,
San Francisco,
San Juan,
Whippany,
NJ and
St. Louis. Internationally the firm has offices in
London,
Beijing,
Dublin,
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 management and business innovation. This was the second time in the past three years that Bear Stearns had achieved this "top" distinction.
Subsidiaries
Bear Stearns also conducts business through other wholly owned subsidiaries, including Bear Stearns Global Lending Limited, Custodial Trust Company, Bear Stearns International Limited, Bear Stearns Bank, Bear Stearns Financial Products Inc., Bear Stearns Capital Markets Inc., EMC Mortgage Corporation, Bear Stearns Mortgage Capital Corporation, Bear Wagner, Bear Stearns Credit Products Inc., Bear Energy LP, Bear Stearns Forex Inc., Bear Stearns Asset Management Inc and Rooftop Mortgages. Bear Stearns also holds an 80% interest in Bear Measurisk.
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. Bear Stearns' 2007 SEC 10k filing page 80.
As of November 30, 2007 Bear Stearns had notional contract amounts of approximately $13.40 trillion in
derivative financial instruments, of which $1.85 trillion were listed futures and option contracts. In addition Bear Stearns was carrying more than $28 billion in assets on its books at the end of fiscal 2007 versus a net equity position of only $11.7 billion. 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.
Major shareholders
The largest Bear Stearns shareholders as of December 2007 are:
- JPMorgan & Chase - 49.5% of the company (45% of which was acquired as part of the deal to raise the buyout to $10 from $2)
- 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%
- Mr. Aglamaz - 0.85%
Subprime mortgage hedge fund crisis
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. The funds were invested in thinly traded
collateralized debt obligations (CDO) found to be worth less than their
mark-to-model 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 may be forced to liquidate its CDOs, prompting a mark-down of similar assets in other portfolios.
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.
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.
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.
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 20 report in the
New York Times noted that Bear Stearns posted a 61 percent drop in net profits due to their hedge fund losses. 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.
On
March 14,
2008,
JPMorgan 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 going insolvent.
On
March 16, 2008, Bear Stearns signed a merger agreement with
JP Morgan Chase in a
stock swap worth $2 a share, through which both the shareholders and employees were decimated at the expense of maintaining an orderly market for the greater good. In addition, the Federal Reserve agreed to issue a
non-recourse loan to
JP Morgan Chase thereby assuming the risk of Bear Stearns' less liquid assets. This represents a staggering loss, in league with that of now infamous
Enron, as its stock had once traded at $172 a share as late as January 2007, and $93 a share as late as February 2008.
On
March 20, 2008,
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 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 self-fulfilling, Cox said.
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.
On
March 24, 2008, a new agreement was reached that raised JP Morgan Chase's offer to $10 a share, up from the initial $2 offer. The sweetened deal was aimed to quiet upset investors and any subsequent legal action brought against JP Morgan Chase as a result of the deal. The Bear Stearns bailout is seen as an extreme-case scenario, and continues to raise significant questions about Fed intervention.
Notable current and former employees
Business
Jeffrey Epstein—private investor
John D. Howard—private equity manager
Jerome Kohlberg, Jr., Henry Kravis and George R. Roberts—founders of Kohlberg Kravis Roberts & Co.
Sanford I. Weill—former chairman and CEO of Citigroup
Jay P. Trevor— President and CEO of J&T Development LLC, an influential real estate development firm providing affording housing in New Orleans post-Hurricane Katrina.
Gerald Schwartz—Chairman and CEO of Onex Corporation
Christopher Gardner—CEO of the brokerage firm Gardner Rich & Co, and author of the memoir The Pursuit of Happyness, being the basis for a 2006 film of the same name.
John A. Mulheren—financier and philanthropist, CEO of Bear Wagner Specialists (acquired by Bear Stearns in 2001) from 1991 until his death in 2003.
Carleton A. Holstrom —CFO from 1977 to 1987, took Bear Stearns public in 1985.
Daniel Scotto— former Director of Research, currently President and CIO of Whitehall Financial Advisors LLC.
Dana Telsey—former Bear Stearns Sr. Managing Director, Retail Analyst, and regular CNBC guest retail commentator; now CEO of Telsey Advisory Group
John Paulson -former Bear Steans MD, now a top hedge fund manager, running Paulson & Co. According to Forbes, he made $3 billion dollars in 2007-early 2008 by shorting, of all things, subprime mortgages.
Politics and public service
Aída Álvarez—Administrator of the U.S. Small Business Administration (1997–2001)
Carol Bellamy—Executive Director of the United Nations Children's Fund (1995–2005)
Raymond W. Kelly—Commissioner of the New York City Police Department (1992–1994; 2002–present)
Other
Justin Brannan—musician/radio announcer
Jon Favreau—comedian/actor/director
Bill Fischetti—investment banker
Sidney Hertzberg—basketball player
Lawrence Kudlow—economic commentatorFurther Information
Get more info on 'Bear Stearns'.
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