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The recent collapse of the 85-year-old Bear Stearns Investment bank happened because there was a run on the bank and they ran out of cash! The share price crashed from $10.00 to $2.00 in a matter of days and the Fed came into to rescue the flailing bank. A rescue package was put together so that rival JPMorgan Chase banking conglomerate were able to bid to take over the company for a scant $2.00 per share. Shareholders resisted this risibly low offer, so the Chase group upped its bid to $10.00. JPMorgan Chase has been growing hugely over the past few years, having quadrupled their turnover between 2004 and the present time. A cheap acquisition of Bear Stearns would have and probably will cause them to grow even more. Bear Stearns shareholders are scheduled to meet at the end of May 2008 to vote on whether to accept their rival’s offer.

What happened?

Bear Stearns got deeply involved in the sub-prime mortgage market. In the hey day of the property boom, anybody and their dog could get a mortgage. People who did not check out properly were offered high interest ARM or Adjustable Rate Mortgages and not too many questions were asked. Mortgage brokers made high commission and were not prepared to ask many questions because declining people meant that commission checks decreased. Banks were happy because they were moving a lot of product and everybody was happy, until the whole thing began to fall on its face in 2006. People who were not qualified for their mortgages began to default and the good days began to turn sour. Anybody who was even half-awake could have predicted this. Banks and governments could see what was happening but they let matters ride. I suspect it was New York State Governor Eliot Spitzer’s article to the Washington Post in February 2008 pointing out how the Bush administration had gone along with this circus, rather than his involvement with prostitutes that brought about his downfall in March 2008.

Hedge Funds

Bear Stearns had a huge stake in the risky mortgage business, as did many, many banks. They knew it was a risky business, but the profits were simply too good to resist. Nobody asks too many questions when you are making money. The first maverick to reach fame in this way was trader Nick Leason who brought the British Bank, Bearings to its knees. Hedge Funds are investment groups whose operation is largely unregulated and tend to work in unorthodox ways. Bear Stearns had two Hedge Funds that specialized in sub-prime mortgage. These failed in 2007 and brought the liquidity of the bank into question. When banks are in trouble other banks bail them out. Curiously nobody else wanted to bail Bear Stearns out except the Federal Reserve Corporation who were afraid that the collapse of such a big player would be very messy. The other banks stood back and allowed the Chase Group to move in with a very low bid. A bid that did not even cover the value of the bank’s property in NYC. Could it be thus was an example of takeover warfare at its finest? Did the Fed step in to allow MorganChase to make the acquisition? It’s a good question? Still we shall have to wait and see whether the shareholders accept the offer.

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