Bear Sterns Rise and Fall

The financial industry had gone to several crises through the decades. Around 2008, Alex Preston notice that the investments banking industry was in a crisis. Big banks were closing its doors or selling out to other companies. As it was the case of the National City Corp.; the first ever American’s mortgage maker had to close its doors after taking a large amount of proprietary risk. Other big financial companies like Goldman Sachs and Morgan Stanley, to avoid having to go down the same way, became bank holding companies, which means that these companies could receive emergency federal funds.

These losses necessitated governmental action in the financial markets. Companies such as Lehman Brothers and Bear Stearns lost all of their stock’s value and were forced into bankruptcy. This risk spread throughout the American banks, forcing the American government to step in and buy all of the securitized, troubled assets from the balance sheets of

The taxpayers would not be willing to go for another bailout therefore trying to fix this issue with a private sector deal seemed a better fit for this situation. The deal would assemble all the major banks CEOs in a room and they would have to find a solution together on how they could rescue Lehman Brothers, Paulson was not going to bail them with government money because he said they always make the same mistakes and never learn they get greedy and therefore they should see this as

All the firms turn to the hedge funds but failed and to bail the banks, Hank Paulson and Ben Bernanke asked the congress for 700 billion dollars.

The banks were bailed out in 2008 because the government wanted to buy $700 billion to buy distressed mortgage, and to take off debts on the banks books. The bailout created a bill called the Troubled Assets Relief Program. This means troubled banks have the right to submit a bid price to sell their assets to TARP as part of a reverse auction. This act helps the government know they did not spend a certain amount of money. The bank was bailed out by George Bush in October 3, 2008. The Volcker Rule affect the risky investment by having a hold on what type of trading that the banks do. This Act does not allow investment banks into trading with low quality assets, as in options, derivatives and

Several factors could have affected our nation if the Federal Reserve did not step in and bail out Bear Stearns. One factor is our economy. If half of the Bear Stearns’ employees were laid off, the unemployment rate would increase and would affect the working class throughout the nation, and jobs would become harder to

The Lehman Brothers, another investment bank, also encountered failure due to rumors and toxic investments. Due to the Federal Reserveʻs assistance to Bear Stearns, Lehman brothers expected the same treatment, which Henry Paulson denied to them. As a result, markets failed and the entire system was jeopardized. AIG, the largest insurance corporation in the nation, also needed loans to avoid bankruptcy. Ben Bernanke then lent them 85 billion dollars, which meant that the government had 80% of ownership, and essentially controlled, the largest insurance company. By the end of the crisis, Paulson and Bernanke had no other option than to spend $700 billion dollars to aid all of the major banks, which ultimately contradicted their principle of opposition to government intervention. Even after this plan had been implemented, there was still uncertainty on whether or not all of the money spent would suffice to salvage the financial

The bailout was a slap on the wrist for the major banking companies; they were not punished for their risky investments. The amount they were forced to pay in fines was merely nothing compared to the amount of money their bank makes per year. As said by William Cohan who worked on Wall Street for seventeen years as a mergers and acquisitions

The nation’s central bank, the Federal Reserve, backed the loan helping to prevent the collapse of Bear Stearns and to stabilize the financial market. The Federal Reserve and JP Morgan Chase extended an immense line of credit to help Bear Stearns stay afloat. In a matter of one-week Bear Stearns went from $70 to $2 a share. The Federal reserve, JP Morgan Chase and Bear Stearns pulled off what usually would take months, took only a weekend before the market reopened on Monday. Ultimately, selling Bear Stearns to JP Morgan Chase for $2 a share (Greenberg and Singer, 2010).

Bear Stearns had two hedge funds under one of his companies, Bear Stearns for Asset Management. the name of the two funds are 1- high grade structured credit strategies enhance the leverage fund by $20 billion and the second one is 2- high degree of structured credit strategies fund, the funds were losing because of the mortgages crisis because most of the fund were made in the form of collateralized debt obligations(CDO), the first fund was backed by house mortgages . the first fund was three years old, and was generating return for 40 months without any loss, but when the financial crisis start to happen and the housing market start to fall in the end of 2006 the fund return start to decrease . They collected 35 times more then what they

On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman 's bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide. The consequences for the world economy were extreme. Lehman’s ' fall contributed to a loss of confidence in other banks, a worldwide financial crisis and a deep recession in many countries. Lehman 's collapse roiled global financial markets for weeks, given the size of the company and its status as a major player in the U.S. and internationally. Many questioned the U.S. government 's decision to let Lehman fail, as compared to its tacit support for Bear Stearns, which was acquired by JPMorgan Chase & Co. (JPM) in March 2008. Lehman 's bankruptcy led to more than $46 billion of its market value being wiped out. Its collapse also served as the catalyst for the purchase of Merrill Lynch by Bank of America in an emergency deal that was also announced on September 15.

There has been a debate for years on what caused the Financial Crisis in 2008 and if there was one main cause, or a series of unfortunate events that led to the crisis. The crisis began when the market was no longer funding many financial entities. The Federal Reserve then lowered the federal funds rate from 5.25% to almost zero percent in December 2008. The Federal Government realized that this was not enough and decided to bail out Bear Stearns, which inhibited JP Morgan Chase to buy Bear Stearns. Unfortunately Bear Stearns was not the only financial entity that needed saving, Lehman Brothers needed help as well. Lehman Brothers was twice the size of Bear Stearns and the government could not bail them out. Lehman Brothers declared bankruptcy on September 15, 2008. Lehman Brothers bankruptcy caused the market tensions to become disastrous. The Fed then had to bail out American International Group the day after Lehman Brothers failed (Poole, 2010). Some blame poor policy making and others blame the government. The main causes of the financial crisis are the deregulation of banks and bank corruption.

The move came after Bear Stearns was bleeding cash after word spread about the company’s crumbling position. European banks and other brokerage clients were pulling their investments and loans with Bear Stearns rapidly—and the company was losing billions in a week. In a swift move, the CEO of Bear Stearns, Alan Schwartz, was connected with the FED Chairman Ben Bernake, who agreed to loan money to JPMorgan if the financier company took over the quickly deteriorating Bear Stearns. It is argued that the FED was right in doing so as this move not save one of the largest American investment banks thus preventing a crushing blow to the US economy.

Investment banks and hedges funds were the most important sources of credit in the economy. The regulatory controls that were applied to the shadow banking system were different from depositorybanks. The only way these entities could purchase long-term, illiquid and risk assets was by borrowing short term in liquid markets. Due to disruptionsin credit markets there were forced to sell their long term assets at lower prices. This resulted in asset financed overnight in tri-party to increase to $2.5 trillion and asset hedge funds to also increase by $1.8 trillion. The top five bank holding companies total asset in the United States were just over 6 trillion and total assets of entire banking system were 10 trillion. According to (Paul Krugman 2009) the main cause of the crisis was shadow banking system. Furthermore, he said that the government officials supposed to enforce the regulatory control system as they did to the depository banks. In September 2008, there was a run on money market –mutual funds. These funds were used to obtain working capital by investing in short term commercial papers. Weekly withdrawals from these funds increased from $7.1 billion to $144.5 billion. Moreover investors withdrew their money which led to corporations being unable to reinvesting their short term

In 1994, Richard S. Fuld took control of Lehman Brothers as its Chief Executive Officer (CEO). Under Fuld’s aggressive leadership, the company flourished and became one of the largest investment banks in the United States. （Crossley-Holland 2009) reported that in 1994, each Lehman Brothers stock was averaging at $4 and by 2007 it catapulted to $82 creating a 20 fold increase. From 1994, Lehman Brothers gradually adopted an aggressive growth business strategy by expanding into highly complex and risky products such as Credit Default Swaps (CDS) and Mortgage-Backed Securities (MBS). By 2007, Lehman Brothers was the biggest underwriter of mortgage-backed securities of the U.S. real estate market.