what was bear stearns 
bear stearns was a global investment bank located in new york city that collapsed during the 2008 financial crisis the bank was heavily exposed to mortgage backed securities that turned into toxic assets when the underlying loans began to default bear stears was ultimately sold to jpmorgan chase at a fraction of its pre crisis value understanding bear stearnsthe bear stearns company was founded in 1923 and survived the stock market crash of 1929 becoming a global investment bank with branches around the world competent management and risk taking saw bear stearns continue to grow with the global economy 1 it was one of the many firms to embrace lewis ranieri s securitization of debt to create new financial products 3by the early 2000s bear stearns was among the world s largest investment banks and a highly respected member of wall street s pantheon of investment banks despite surviving and then thriving after the great depression bear stearns was a player in the mortgage meltdown and great recession that followed bear stearns operated a wide range of financial services inside this mix were hedge funds that used enhanced leverage to profit from collateralized debt obligations cdos and other securitized debt markets in april 2007 the bottom fell out of the housing market and the investment bank quickly began to realize that the actual risk of these hedge fund strategies was much larger than originally believed 4the collapse of the housing market caught the whole financial system by surprise as much of the system was based upon a foundation of a solid housing market underpinning a solid derivatives market the bear stearns funds used techniques to further jack up the leverage to these supposed market fundamentals only to find out that the downside risk on the instruments they were dealing with wasn t limited in this extreme case of market collapse 4the bear stearns hedge fund collapsethe hedge funds using these strategies posted massive losses that required them to be bailed out internally costing the company several billion upfront and then additional billion dollar losses in writedowns throughout the year this was bad news for bear stearns but the company had a market cap of 20 billion so the losses were considered unfortunate but manageable 5this turmoil saw the first quarterly loss in 80 years for bear stearns 6 quickly the rating firms piled on and continued to downgrade bear stearns mortgage backed securities and other holdings this left the firm with illiquid assets in a down market the company ran out of funds and in march 2008 went to the federal reserve for a credit guarantee through the term securities lending facility another downgrade hit the firm and a bank run started by march 13 bear stearns was broke its stock plummeted 5jpmorgan chase buys bear stearns assetswith insufficient liquidity to open its doors bear stearns approached the federal reserve bank of new york for a cash loan of 25 billion when that was denied jpmorgan chase agreed to buy bear stearns for 2 a share with the federal reserve guaranteeing 30 billion in mortgage backed securities the final price was ultimately raised to 10 a share still a sharp drop for a company that had traded at 170 a year earlier 72jamie dimon the ceo of jpmorgan chase would later regret the decision saying it cost the company several billion to close out the failing trades and settle litigation against bear stearns under normal conditions the price we ultimately paid for bear stearns would have been considered low he wrote in his 2008 letter to shareholders the reason bear stearns was sold off so cheaply is that at the time no one knew which banks held toxic assets or how big of a hole these seemingly innocuous synthetic products could knock in a balance sheet we were not buying a house we were buying a house on fire 8jpmorgan would go on to acquire another investment bank washington mutual shortly after the two acquisitions would ultimately cost a combined 19 billion in fines and settlements 910jpmorgan s acquisition of bear stearns was only possible thanks to a 30 billion guarantee from the federal reserve this bailout raised major questions about the role of the government in a free market economy 2lehman brothers collapsethe illiquidity that bear stearns faced due to its exposure to securitized debt exposed troubles at other investment banks as well many of the biggest banks were heavily exposed to this sort of investment including lehman brothers a major lender of subprime mortgages by 2007 lehman brothers held 111 billion in real estate assets and securities more than four times its shareholder equity 11 it was also heavily leveraged meaning that a relatively minor downturn could wipe out the value of its portfolio for most of 2008 lehman brothers attempted to unwind its positions by selling stock and decreasing leverage however investor confidence continued to bleed out after a failed takeover by barclays and bank of america lehman brothers declared bankruptcy 12