Bear, Stearns & Co., Inc.

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Bear, Stearns & Co., Inc., now a subsidiary of JPMorgan Chase, was a global investment banking, securities trading and brokerage firm.

Financial crisis and the bailout

Role in the financial crisis

Bear Stearns, founded in 1923, was the fifth-largest American investment bank at the time of its demise. A pioneer in securitization and the asset-backed securities markets, the firm's affiliates became heavily involved in trading in complex derivatives backed by home mortgages. As losses mounted the company "doubled down," increasing its exposure. They “leveraged” as much as 35 times its available money to trade but in 2007 a new fund borrowed at 100 times its cash[1].

After a March 2008, Federal Reserve loan the company was sold to JPMorgan Chase.[2]

Bear Stearns' collapse and sale occurred at the beginning of the 2008 financial meltdown of Wall Street and was a "red flag" of the financial trouble which came to a head in September 2008, leading to thee global financial crisis and ensuing recession[3].

High leverage

In 1975, the SEC’s trading and markets division ruled that investment banks must maintain a debt-to-net capital ratio of less than 12 to 1. In 2004, following extensive lobbying by the investment banks, the SEC under chairman Christopher Cox authorized five investment banks to develop their own net capital requirements. This enabled investment banks to push borrowing ratios to as high as 40 to 1.[4] These five investment banks were Goldman Sachs, Morgan Stanley, Lehman Brothers, Bear Stearns, and Merrill Lynch. This very high debt-to-reserves helped lead to the financial crisis of 2008 by weakening the ability of these institutions to recover from losses incurred when the risky CDO and CDS bets failed.[5][6]

Lee A. Pickard, who had been Director of the SEC’s Division of Market Regulation when the 1975 12-1 rule was ordered, said of the change, "The SEC modification in 2004 is the primary reason for all of the losses that have occurred."[7]

At the time of its collapse Bear Sterns was leveraged at a ration of 35.5 to 1.[8]

SEC complicity

A 2008 Security and Exchange Commission (SEC) Inspector General's report found that the SEC “was aware ... that Bear Stearns’ concentration of mortgage securities was increasing for several years and was beyond its internal limits.” Nevertheless, it “did not make any efforts to limit Bear Stearns’ mortgage securities concentration.” The IG said the SEC was “aware that Bear Stearns’ leverage was high;” but made no effort to require the firm to reduce leverage “despite some authoritative sources describing a linkage between leverage and liquidity risk.” Furthermore, the SEC “became aware that risk management of mortgages at Bear Stearns had numerous shortcomings, including lack of expertise by risk managers in mortgage backed securities” and “persistent understaffing; a proximity of risk managers to traders suggesting a lack of independence; turnover of key personnel during times of crisis; and the inability or unwillingness to update models to reflect changing circumstances.”[9]

Political influence

Campaign contributions

James E. Cayne, Chairman and Chief Executive Officer of Bear Stearns, is a Bush Pioneer having raised at least $100,000 for Bush in the 2004 presidential election. [10]

Bear Stearns gave $127,500 to federal candidates in the 2006 election through its political action committee - 25% to Democrats and 75% to Republicans. [11]

Other political campaign contributions:

Lobbying

The company spent $780,000 for lobbying in 2006. $420,000 of this went to three lobbying firms - Venable LLP, Steptoe & Johnson, and Angus & Nickerson. [12]


Earnings and bonuses

Stock fraud

One of the nation's largest investment banking and brokerage firms, Bear Stearns & Co. is facing a number of securities and investment fraud charges. According to reports, in an effort to increase profits, Bear Stearns management supported fraudulent actions committed by a number of its clients, including stock manipulation and illegal trades. Stearns recently agreed to pay fines of $80 million as part of a settlement with the Attorney General of the State of New York.

"Stock fraud allegations involving Bear Stearns include the following securities" (as stated):[13]

Contact information

Web: http://www.bearstearns.com

Resources and articles

Related SourceWatch articles

References

  1. Bryan Burrough, Bringing Down Bear Stearns, Vanity Fair, August, 2008, retrieved Sept. 30, 2009.
  2. Andrew Ross, JP Morgan Pays $2 a Share for Bear Stearns, The New York Times, March 17, 2008, Retrieved on September 30, 2008.
  3. John Waggoner and David J. Lynch, Red flags in Bear Stearns' collapse, USA Today, March 19, 2009, retrieved Sept. 20, 2009
  4. Stephen Labaton, Agency’s ’04 Rule Let Banks Pile Up New Debt, NY Times, October 8, 2008. Retrieved October 9, 2009
  5. Julie Satow, Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers, NY Sun, September 18, 2008. Retrieved October 9, 2009
  6. Ben Protess, ‘Flawed’ SEC Program Failed to Rein in Investment Banks, ProPublica, October 1, 2008. Retrieved October 9, 2009
  7. Julie Satow, Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers, NY Sun, September 18, 2008. Retrieved October 9, 2009
  8. Roddy Boyd, The last days of Bear Stearns, Fortune, March 31, 2008. Retrieved October 16, 2009.
  9. Sold Out - How Wall Street and Washington Betrayed America , Consumer Education Foundation, March, 2009. Retrieved october 10, 2009.
  10. James E. Cayne, Bush Pioneer, Texans for Public Justice, accessed August 2007.
  11. 2006 PAC Summary Data, Open Secrets, accessed August 2007.
  12. Bear Stearns lobbying expenses, Open Secrets.
  13. Bear Stearns & Co. Information, InjuryBoard.com, accessed July 16, 2007.

Profiles

External resources

External articles