Fiscally nuts. Socially insane.

Monday, March 17, 2008

Bear Stearns

Pushed to the brink of collapse by the mortgage crisis, Bear Stearns Cos. agreed -- after prodding by the federal government -- to be sold to J.P. Morgan Chase & Co. for the fire-sale price of $2 a share in stock, or about $236 million.

Bear Stearns had a stock-market value of about $3.5 billion as of Friday -- and was worth $20 billion in January 2007. But the crisis of confidence that swept the firm and fueled a customer exodus in recent days left Bear Stearns with a horrible choice: sell the firm -- at any price -- to a big bank willing to assume its trading obligations or file for bankruptcy.


Read it.

1 comment:

charter member said...

Drexel Burnham.
Kidder Peabody.
And now Bear Stearns.

People who do not learn from the mistakes of history are doomed to repeat them.

Loading up on illiquid long term assets while funded by very short term liabilities is a recipe for financial ruin. When billions in overnight loans came due and suddenly no one wanted to lend Bear any money they couldn't sell their assets to pay off their overnight loans. That's why the Fed stepped in - to prevent a massive drop in bond prices that would take down the entire financial system if Bear was forced to start selling bonds.

They played the carry trade for too long, didn't lock up long term money and paid the price. I really feel for their employees who have lost their life savings. These people got wiped out by management that made a huge mistake.

Lessons
Don't finance long term assets with short term liabilities
Don't put your retirement money in one basket