Is Bear Stearns a bank
What Happened at Bear Stearns
Why in this in the news
One reporter explained that Bear Stearns couldn’t fill out the Federal reserve paperwork fast enough to get the loan directly from the Fed and had to call upon JP Morgan Chase for more instant cash. The rumors of the Bear Stearns problem started to cause serious concerns, even a bit of panic. Panic is the enemy of rational markets. Not understanding the extent of potential financial trouble was the reason Bear Stearns was in the news.
The Bear Stearns short-term financial crisis has been solved. The Federal Reserve provided liquidity and advised Bear Stearns’ board of directors over the weekend to allow a private sale facilitating private firms, and not government intervention and tax-payer money, solve the particular crisis. The problem won’t be solved for Bear Stearns stockholders who have lost millions of dollars, but creditors will be fully paid back.
What does it mean for me
The FDIC has recently announced that it is hiring back 20 retired employees to deal with bank failures expected to occur this year because of poor mortgage lending decisions. When the mortgage issue extended to Bear Stearns, an 85 year-old very respected investment bank, investors were very worried that many large financial institutions would fail. Failures of that scale would create a serious problem for the economy.
Within days, earnings reports were due from other investment banks and they showed strong earnings, helping investors feel like they more fully understood the extent of the sub landscape.
Housing prices may take a long time to come to more realistic levels in parts of the country such as California and Florida where unrealistic bubbles occurred. But to many investors it feels like we are understanding what liabilities are on the books of financial institutions and that a market bottom may be near.
Marion R. Syversen, MBA
70 Main Road South
Hampden, ME 04444
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Bears Stearns was much less diversified. Bear Stearns was a premier issuer of mortgage-backed securities and was very dependent on short-term instruments. The very nature of these short-term instruments make them particularly responsive to market runs. Parties panicked and pulled the instruments over a very short time leaving Bear Stearns with little financing to cover the debt. Bear Stearns is an investment bank. Investment banks are institutions that issue securities, and offer brokerage services as well as financial advisory and asset management services. Investments banks generally do two things: 1.) Investment banks raise money in the form of equity(stocks) or debt(bonds) for corporate clients or public institutions. 2.) They may also underwrite the securities, purchasing them and then selling them to the public. Investment banks such as Merrill Lynch and Goldman Sachs have diversified and also offer into lending, too.