Bear Stearns Collapse Timeline Essay
Bear Stearns Collapse Timeline
This week five years ago, JP Morgan announced it would buy Wall Street rival Bear Stearns in a deal worth $2 a share – this ultimately rose to $10. Here, Financial News looks at the events in the run-up to the fall of the 85-year old independent investment bank. Financial News compiled the timeline from press releases, contemporary media reports and William D Cohan’s account of the collapse of the bank, ‘House of Cards’. May 21, 2007 After months of growing instability in the US sub-prime mortgage market, Bear Stearns chairman Alan ‘Ace’ Greenberg offers reassurances that the firm, heavily exposed to the market, is on top of things.
“The sub-prime (issue) has been blown completely out of proportion,” he says, in comments reported by Dow Jones Newswires. Mid-June 2007 Serious problems become apparent at two Bear Sterns hedge funds with a high exposure to sub-prime mortgages. Investors in the High-Grade Structured Credit Strategies Enhanced Leverage Fund, which managed $600m, are informed that the fund has lost 23% of its value over the year to April, reports The Wall Street Journal. The fund begins a fire-sale to minimise exposures.
After the failure of a mooted rescue plan involving support from lenders, a new rescue scheme is announced by Bear Stearns, which offers $3. 2bn for a bailout of a second fund – the High Grade Structured Credit Fund. The bank previously had only $45m invested in this fund’s equity, according to William D Cohan in House of Cards’. Bear Stearns later says it is providing $1. 6bn to the fund rather than the original $3. 2bn, citing the sale of assets. A decision is made not to rescue the High-Grade Structured Credit Strategies Enhanced Leverage Fund, according to Cohan.
August 3, 2007 Standard & Poor’s downgrades the bank’s outlook to negative. The bank says that concerns over its situation are “unwarranted” as the hedge fund fallout represented “isolated incidents” and “by no means a broader indication” of the bank’s performance, according to The Wall Street Journal. August 5, 2007 Bear Stearns president and co-chief operating officer Warren Spector resigns from the bank. Alan Schwartz is confirmed as sole president. Days later, the Associated Press reports that the bank sends letters to clients reassuring them of its financial position.
September 10, 2007 British billionaire Joseph Lewis expresses his confidence in the future of the bank by acquiring a 7% stake, becoming one of the largest shareholders. October 5, 2007 Federal prosecutors launch an investigation into the collapse of the Bear Stearns hedge funds. November/December 2007 Chief financial officer Sam Molinaro says that the bank has been “very conservative and aggressive” in its revaluations, according to Dow Jones Newswires. On December 10, MarketWatch reports that the bank has written down $1. 9bn related to mortgage exposure.
January 8, 2008 Chief executive Jimmy Cayne steps down after widespread criticism of his hands-off response to the events of the previous year. He remains as chairman. He is replaced at the top by Alan Schwartz. In the same month, the bank announces the closure of a third fund, the Bear Stearns Asset Backed Securities Fund. Bloomberg reports that this fund has suffered a decline of 39% of its value over a year. February, 2008 Hedge fund Peloton Partners, run by Goldman alumnus Ron Beller, collapses following its exposure to asset-backed securities.
March 2008 Carlyle Capital, a hedge fund based in Amsterdam, collapses as concerns over exposures to mortgages begin to multiply, causing a squeeze on lines of funding. By March 5, insurance premiums on Bear Stearns debt have risen from $50,000 per $10m of debt at the beginning of 2005 to $350,000 per $10m debt, according to William D Cohan. It soon reaches $700,000. Monday, March 10, 2008 The company’s stock falls 11% to its lowest level in five years following a Moody’s downgrade of portions of its mortgage bond holdings, writes Cohan.
The bank denies rumours that it is in trouble. Investors look for ways to bet on further falls in the bank’s stock. Tuesday, March 11, 2008 ING Groep, the Dutch bank, cancels $500m of short-term funding for Bear Stearns, according to The Wall Street Journal, following an example set by Rabobank. According to a press release, the Federal Reserve announces an unprecedented lending facility in which collateral can be exchanged for funding, but the scheme cannot be accessed until March 27.
In another important incident, cited by Cohen in ‘House of Cards’, Goldman Sachs refuses to stand in for Hayman Capital in a trade with Bear Stearns, suggesting hemorrhaging confidence among major financial players. Wednesday. March 12, 2008 Overnight markets for funding begin to dry up, while institutions continue to deny short-term lending to Bear Stearns. Hedge funds and other investors continue in their attempts to extract their money from Bear Stearns, which is rapidly approaching a funding crisis. Thursday, March 13, 2008.
As customers continue to withdraw funds, the Securities and Exchange Commission and the New York Federal Reserve begin discussions on the crisis. In a meeting on Thursday night, reported by Cohen, it is discovered that outgoings at the firm can no longer be maintained, with the firm effectively running out of cash during the afternoon. Lawyers are summoned to discuss the options for bankruptcy, while a deal with JP Morgan Chase is sought. After late night negotiations, JP Morgan agrees in conjunction with the Federal Reserve Bank of New York that it will provide secured funding to Bear Sterns for an initial period of up to 28 days.
Friday, March 14, 2008 The cobbled-together deal fails to assuage the markets. Investors continue to pull money from the bank over the course of the day. By the evening, it is clear that a solution will have to be devised over the weekend if the bank is to survive. Saturday, March 15- Sunday, March 16, 2008 JP Morgan says it cannot do a deal without support from the Federal Reserve, due to the large number of toxic securities on the books of Bear Stearns.
In response, the Fed approves a loan of $30bn saying that it is necessary to avoid “serious disruptions in the financial markets”. JP Morgan offers just $2 per share for the bank, a large loss for those whose stock was worth $30 on Friday, $60 the week before and over $150 a year before. Bondholders will be rescued by the deal, which is accepted by the board of Bear Stearns on Sunday morning. Wrangles with JP Morgan over a contract situation – which potentially leaves the bank liable for funding Bear Stearns without claiming full ownership – result in brinkmanship from Bear Sterns.
A final price of $10 per share is agreed, with a value of $1. 45bn attached to the equity. March 25 Bear Stearns chief executive Jimmy Cayne and his wife sell 5. 66 million shares in the bank for $61. 34m, which, according to Cohan, represented a $1bn loss on the bank’s stock. May 29 The final Bear Stearns shareholder meeting takes place, at which former CEO Cayne speaks of his sadness at the firm’s demise, according to The Wall Street Journal, citing guests present.