The Collapse of Bear Stearns

Zach Piwko

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Back Story• Bear Stearns earned a reputation for aggressively investing in Mortgage Backed Securities

•Two of Bear Stearns' highly leveraged hedge funds collapsed in June and July of 2007 •Joe Lewis, a British Billionaire, purchases a 7% stake in Bear Stearns in September 07

• Alan Schwartz appears on CNBC and denies all claims of Bear Stearns being in a crisis two days prior its collapse.

• Bear lends for the long term, borrows for the short term. When long term investments depreciated and short term money dried up, Bear faced a crisis

4/14 – 4/17• Rumors circulate that Goldman Sachs would not enter a financing deal with Bear.

• Bear Stearns closes on 4/14 at $30/share on increased fears the firm is in dire trouble

• Over the weekend about 200 people at JP Morgan work towards arranging a deal to acquire Bear Stearns.

• The Federal Reserve will provide $30 billion in funding for JP Morgan

Deal Specifics• The all-stock deal values Bear Stearns at $236 million, or just $2 a share.

• Bear Stearns recieves emergency funding from JP Morgan, a clause in the deal specifies if Bear declines the offer JP Morgan gains control of their corporate office in NY.

• JP Morgan will give investors 0.05473 shares of its common stock for every share of Bear Stearns they own.

Backlash

• Global markets fall as concerns run rampant about the strength of the US economy and the strength of the US government’s plan to assist in the acquisition of Bear Stearns.

• Billionaire Investor Joe Lewis loses billions in the deal, in a press release he is said to be looking into all options to get the most for his investment.

• 30% of Bear Stearns’ stock is owned by its 14,000 employees. News reports circulate that many are unhappy and explore legal options.

2nd Offer• To “seal the deal” JP Morgan on Monday offered about 5 times the original offer, bumping the cost up to $2.1 Billion from the original $236 million.

• JP Morgan is responsible for the first billion of losses from Bear’s less liquid assets, and will set aside 6 billion for severance, litigation, and other transaction related costs.

• The Federal Reserve Bank of New York will provide 29 billion in funding, and will take control of Bear’s $30 billion portfolio of less liquid assets (which will be managed by BlackRock Inc. on terms to be determined)

• Under the revised deal, each share of Bear Stearns common stock will be exchanged for 0.21753 share of JP Morgan common stock. The previous exchange offer was 0.05473 JP Morgan share for each Bear Stearns share.

• JP Morgan said it expects to complete the purchase of the new Bear shares by April 8. A date for Bear's shareholders to vote on the deal has not been set.

Who Wins?

James Dimon, JP Morgan CEO

DJI

4 weeks

Winners

• JP Morgan will try and maintain as many clients of Bear that it can

•JP Morgan gains Bear Stearns's prime brokerage unit, which provides loans and processes trades for hedge funds, it generated $1.2 billion in revenue last year.

• JP Morgan acquires Bear Stearns on Fed funding

• As the deal becomes more and more viable financial markets have felt some relief that the Fed is using non traditional tools to ease the crisis.

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3/14 – 3pm Today

Who Loses?

Losers

• Bear Stearns, 30% owned by its employees, faces huge job cuts and the destruction of the company’s stock leaves many families with substantially less in their 401ks.

• The Fed has spent about 400 billion up to this point in easing and assisting with the credit crisis.

• The deal controversially exposes tax payer dollars to the bail out of a failed company.

What Now?• Today 60 protestors made their way inside Bear Stearns’ Lobby to voice their opinion in the federal funding of the deal, arguing that homeowners are being abandoned.

What do you think?