Bear Sterns Rise and Fall

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The rise and fall of Bear Stearns

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
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The result was a private bailout by the major financial firms and supervised by the Federal Reserve. Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, JP Morgan, Morgan Stanley, Salomon Smith Barney, and UBS agreed to contribute with $ 300 million each one, while Société Générale invested $125 million and Lehman Brothers and Paribas did the same thing with $100 million.
The only bank that refused the join the syndicate was Bear Stearns. In the Bear Stearns case, the sudden collapse of the firm and the impossibility to calculate the risk of taking Bear’s mortgage holdings forced the Federal Reserve to be involved actively into the bailout instead of the “advisory” role it took in the LTCM case 10 years earlier.

1.4 What could Bear Stearns have done differently to avoid this fate?
In the early 2000’s, after the Federal Reserve dropped the interest rate and raised the money supply trying to control the crisis produced by 9/11 terrorist attacks, the firm’s directors should have been more disciplined with the financial strategies, especially the ones related with hedge funds who made poor quality investments. Furthermore, the failure to evaluate the risk, to diversify the portfolio, and to control the use of high leveraging was driven by the need to justify the enormous
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