The Fall of Bear Stearns
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Case Details:
Case Code : FINC053
Case Length : 18 Pages
Period : 2007-2008
Pub. Date : 2009
Teaching Note :Not Available
Organization : Bear Stearns
Industry : Banking & Financial Services
Countries : France
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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.
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Excerpts
The Sub-Prime Crisis
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After the dot com bust and the terrorist attacks in 2001, the Fed started slashing rates aggressively to revive the US economy that was slipping into recession. Low interest rates, with the prime rate reaching 4.5% in January 2003 as against 9.05% in January 2001, led to a significant increase in the number of home loan borrowers...
Bear's Risky 'Hedge' Funds
Bear had been involved in the mortgage business since the early 1990s. The investment bank had established a subsidiary called EMC Mortgage Corporation (EMC) in 1990 which specialized in the servicing, securitizing, and disposition of residential loans...
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Rumors that Killed the Bear
On March 10, 2008, rumors of liquidity problems at Bear started making the rounds. Rating agency Moody downgraded a few of the bonds issued by Bear on that day. As the rumor of the liquidity crisis at Bear gathered momentum, Bear's shares started falling sharply...
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The Blame Game
Some of Bear's executives blamed short sellers for spreading rumors about the liquidity crisis in their organization. They also blamed Alan Greenspan (Greenspan), Former Chairman of the Fed, for restricting investment banks and allowing only commercial banks to access the Fed discount window when the Glass-Steagall Act was repealed...
Exhibits
Exhibit I: Stock Price Chart of Bear Stearns (March 2004 - March 2009)
Exhibit II: Pictorial Representation of Subprime Crisis
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Exhibit III: Key Financial Details of Bear Stearns (2003 - 2007)
Exhibit IV: Unusual Trades in Derivative Instruments of Bear Stearns
Exhibit V: Risk Management Practices at Bear Stearns
Exhibit VI: Note on Value at Risk and Stress Testing
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