Bear Stearns survived the 1929 crash but not a week of rumours
Founded in 1923, Bear Stearns came through the Wall Street Crash without laying off a single employee. Eighty-five years later its ready cash fell from 18.1 billion dollars to 2 billion in three days of March 2008, and a firm whose shares had traded at 172 dollars was sold for 2 dollars a share.
Joseph Bear, Robert Stearns and Harold Mayer launched it as an equity trading house with 500,000 dollars, and despite early quarrels among the founders it grew into America's fifth largest investment bank. It opened in Chicago in 1933 and Amsterdam in 1955, went public in 1985, and by 2007 employed more than 15,500 people. Fortune's survey named it the most admired securities firm.
The trouble lay on the balance sheet. At the end of fiscal 2007, 11.1 billion dollars of equity supported 395 billion in assets, leverage of about 35 to 1, and much of it was hard-to-sell holdings tied to mortgages. In June 2007 two of its hedge funds invested in thinly traded mortgage securities began collapsing; the firm pledged up to 3.2 billion to rescue one, but by July both had lost almost everything. A co-president resigned, and that November the firm announced its first loss in 83 years.
In March 2008 the New York Federal Reserve first offered a 28-day loan, then withdrew it and instead set up a vehicle to buy 30 billion dollars of Bear's assets while JPMorgan Chase agreed to buy the bank itself. A loosely drafted guarantee and furious shareholders forced JPMorgan to raise its price to 10 dollars a share. Ben Bernanke argued a bankruptcy could have caused a chaotic unwinding across markets, while former Fed chairman Paul Volcker said the rescue went to the very edge of the central bank's powers.
The securities regulator's chairman, Christopher Cox, blamed a collapse of confidence rather than capital: rumours about liquidity made lenders pull back, and the fear fulfilled itself. Two fund managers were later tried and acquitted of misleading investors. JPMorgan retired the Bear Stearns name in January 2010.
Source: Bear Stearns
