Bear Stearns’ pending acquisition by J P Morgan Chase has caused investors to question how Bear, which had nearly $400 billion in assets and $12 billion in shareholder equity, went from normalcy to near bankruptcy in seven days.
Some experts blame Bear’s fall on opaque assets, derivatives exposure and liquidity demands. The fact however remains that a “run on the bank” led to the company’s sudden demise.
“If the market is driven by an irrational fear, then it’s very difficult to come up with a strategy that can quell that,” says Kris Niswander of SNL Financial.
Looking at the assets listed on a company’s balance sheet, which for Bear’s totaled $395 billion at the end of 2007 does not automatically translate to fiscal stamina. The portion of assets which equal cash or the cash equivalent does. Bear only had $34 billion in cash on hand.
When customers started withdrawing cash from Bear’s 900 hedge funds and moving them to competitor firms (Morgan Stanley and Goldman Sachs) or demanding better terms on financing, Bear found itself in a classic dilemma: sell assets to raise more cash.
The problem, however, was that many of the assets Bear recorded on its books were mortgage-backed securities, which are hard to sell. Word that funds were pulling assets from Bear Stearns sparked the “run on the bank” and stripped the firm of much-needed cash. In the end, Bear’s situation mirrored that of a homeowner facing foreclosure?either pay what is due or lose ownership of property.
The Federal Reserve, in conjunction with J P Morgan Chase, allowed Bears to access its discount cash window as a temporary solution to Bears’ problems but the handwriting was on the wall. Several days later, Bear Stearns was forced into selling the 85-year-old firm to J P Morgan.
With a lack of clear information about how widespread the subprime problems are, investors are simply opting to sell or do nothing. The Bear scenario generates reasonable concerns that the problems that took down the company could spread to other firms.
“Confidence continues to be in question for all the other firms out there,” advised Larry Adam, U.S. chief investment strategist at Deutsche Bank.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing individual and institutional investors regarding their subprime problems. For further information, please contact us.