The Bear Stearns board was enraged. In March 2008, less than eighteen months after trading at over $175/share, they faced a bailout offer of $2/share from JP Morgan. With no other offers in sight.
How had this happened to an 85-year-old investment bank surviving the Great Depression, Savings & Loan crisis, and dot-com implosion?
Founded in 1923, Bear Stearns was known as a maverick with a cutthroat, bond-trading-rooted culture. “We are really looking for people with PSD degrees . . . poor, smart, and with a deep desire to become very rich,” former CEO Alan Greenberg said. Going public in 1985, the firm became a full-service, highly successful investment bank. Its cutthroat reputation grew: it was the only bank refusing to bail out hedge fund Long Term Capital Management in the late 1990s. Yet Bear’s stock skyrocketed, appreciating some 600 percent from 1993 to 2008.
When Bear Stearns accepted JP Morgan’s acquisition offer of $2/share in March 2008, it was a collapse a decade in the making—and just the first in a series of failures, mergers and restructurings that would permanently alter the banking industry.
It was not to last. Since the late 1990s the U.S. housing boom had driven up investors’ risk appetites, largely through collateralized debt obligations representing securitized mortgages—increasingly, subprime mortgages. When housing prices dropped sharply starting in 2006, several Bear Stearns Asset Management funds, leveraged as high as 100x, filed for bankruptcy. Things quickly worsened: Bear’s bids for cash injections (including from legendary private-equity firm KKR) failed; internal factions heatedly debated strategy, many calling for CEO James Cayne’s resignation. Then, in early March 2008, credit-rater Moody’s downgraded multiple Bear mortgage-backed bonds; other firms scrambled to withdraw or sell Bear-based assets. Only a large infusion of cash could save the Bear now.
A Friday-night call made clear how desperate the situation had become: Bear had 48 hours to find a buyer or file for bankruptcy. One by one, despite pressure from the Federal Reserve to bail Bear out, prospective buyers dropped out, leaving only JP Morgan. When the exhausted Bear board finally accepted JP Morgan’s offer of $2/share (eventually upped to $10/share), it was the official end of the iconic bank.
Market observers tried to make sense of Bear’s fall, with hypotheses including large-scale shorting of Bear by investment funds. In the bigger picture, it became clear that broad banking trends—especially major deregulation and consolidation of the industry in the late 1990s—had transformed pure-play investment banks from advisory institutions to disguised hedge funds, part of a “shadow banking” industry. Now the remaining pure-play banks—Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley—faced their own consequences of these trends and Bear’s failure, leading to collapse, merger, or restructuring.
In his two-part case Investment Banking in 2008: Rise and Fall of the Bear, Kellogg Clinical Professor of Finance David Stowell examines the trends, companies, and characters with key roles in Bear Stearns’s collapse—and the far-reaching implications for other financial-services players and ultimately the public.
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