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Once-mighty Bear killed by subprimes

Janet Babin Mar 17, 2008

Once-mighty Bear killed by subprimes

Janet Babin Mar 17, 2008


KAI RYSSDAL: To be clear: That $2 a share for Bear Stearns wasn’t available to the general public. It’s what JP Morgan said last night it’s going to pay to take over its smaller and far more troubled competitor — with a little help from the Federal Reserve.

But I’m getting ahead of myself. The news from Friday might be a good place to begin this afternoon. That’s when we learned JP Morgan and the New York Fed were going to be propping up a faltering Bear Stearns.

To say it caught everyone off guard would be an understatement. Sure, we’d all known Bear was hurting because of subprimes. But this time last week, CEO Alan Schwartz was on television assuring investors that everything was fine, that the bank had plenty of money to run its business.

Friday took the wind right out of those sails — the stock lost more than half its value. Still, it was worth $30 a share. From North Carolina Public Radio, Marketplace’s Janet Babin explains how Bear got from there to $2 a pop.

Janet Babin: As subprime mortgages got more lucrative, Bear Stearns got more aggressive. It originated, converted and resold these risky loans. Financial strategist Richard Bove with Punk Ziegel estimates that mortgages ended up being a good 40 percent of Bear Stearns’ earnings:

Richard Bove: When the mortgage industry started to falter, instead of Bear Stearns backing off from the business, they continued to push ahead by increasing their exposure to subprime mortgages.

By last summer, the losses began piling up. Two hedge funds managed by Bear Stearns collapsed. CEO Jimmy Cayne assured investors that the situation was contained, and hit the golf course even as the dominos started to fall. He was pushed out by January.

Fast forward to last week. Rumors swirled: Bear had liquidity problem. Once again, the company assured investors that all was OK. Then hedge fund Carlyle Capital went under. Bear Stearns was one of its big lenders. Richard Bove says that was the tipping point that started a good old-fashioned bank run on Bear Stearns:

Bove: There was a general feeling that we just want to get our money out here because we don’t know what’s going on, and everything we hear about this company is negative. So let’s get away.

By Sunday, it was bailout or bankruptcy. JP Morgan agreed to buy Bear Stearns at $2 a share. The Fed backed it all up.

And the bailouts may not be over. Quincy Krosby is chief investment strategist at The Hartford:

Quincy Krosby: At the very heart of all is this is a deteriorating housing market — and if they cannot get the values of the mortgages at least stabilized, the problems are just going to continue.

I’m Janet Babin for Marketplace.

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