Bear Stearns, the fifth largest investment bank on Wall Street, has fallen. The end was exacerbated by Bears’ exposure to the subprime markets and the ongoing credit crisis.
Just days before the Fed and JP Morgan stepped in to rescue Bear, most on Wall Street would have said that it was unthinkable that a major investment firm would fall. In fact, even as rumors of Bears’ liquidity problems surfaced, no one was speaking of total collapse. However, within days of the rumors, the Fed and the Treasury Department were working to put a deal together to bail out Bear Stearns.
On a long Sunday, government officials met with officers and directors of Bear and JP Morgan in an attempt to broker a deal that would prevent the bankruptcy of a major Wall Street player. At the end of the day, a deal had been reached. JP Morgan would buy Bear Stearns for $2 a share.
In the aftermath of the announcement, Bear shareholders were crying foul. Bear was, afterall, trading for over $150 a share a year ago. As a result of shareholder discontent, JP Morgan has recently raised its offer to $10.02 a share-still a far cry from what Bear was trading at just two weeks ago.
The question for many investors is ‘how could this happen?’ How could such a prominent Wall Street firm simply fail? The answer is partly due to the complexities of the products that Bear (and other investment banks) create to sell to investors.
As babyboomers retire and the amounts of investable monies grow, Wall Street is looking for new ways to generate profits (for both themselves and clients). As a result, investment firms are constantly creating products that supplement the usual stocks, bonds and mutual funds. One of those newly created investments, collaterized debt obligations (CDOs), is generating quite an impact on the markets today.
CDOs are investment products that pool mortages and other debt together and are sold to investors. Much has been written about how mortgages, often of the subprime variety, were packaged by investment banks and sold. As the housing market burst, many homeowners were left unable to meet their mortgage payments. The result has been an increase in defaults and therefore a decline in the value of the investments.
It seems to many that a perfect storm came together and that Bear Stearns was a victim of the unforseeable. However, the problems in the current market were created by Wall Street. Bear Stearns, and others like them, are not victims of the credit crunch. They are responsible for it. The real victims are the investors who were sold products that were unsuitable, whose risks were not properly disclosed and who have lost millions as a result.
Although the collapse of Bear Stearns is a historic event, the collapse of many investors’ portfolios is the true tragedy. The government has stepped in to help the investment banks, who is going to help the real victims?