A Look at Bear Stearns Before Its Downfall
By DEALBOOKArticle Tools
The Financial Crisis Inquiry Commission has released documents that show Bear Stearns appeared optimistic about its prospects a year before the rapidly growing subprime mortgage crisis caused the firm’s demise in March 2008.
Minutes from a Bear Stearns board meeting on Jan. 10, 2007, said James E. Cayne, then the firm’s chief executive, “indicated that business continued to be buoyant.” And a “Fixed Income Overview” for the Bear Stearns investor day on March 29, 2007, proclaimed that “credit products continue to produce record revenues.” (Read the documents after the jump.)
The Securities and Exchange Commission was also following the subprime market and an internal risk management report from Feb. 1, 2006, said there was “a continued strong appetite for non-investment grade loans.”
Over the course of a year, S.E.C. officials did note a decline in the subprime market. A report on March 30, 2007, said that “Bear’s mortgage business incurred significant market risk losses on its residential mortgage inventory.” Still, the memo said, “hedge funds appear to be weathering the turmoil in the subprime space.”
But the subprime market deteriorated substantially in 2007, causing two of Bear Stearns’s hedge funds to collapse over the summer. The huge subprime losses at Bear Stearns ultimately led Mr. Cayne to step down as chief executive on Jan. 8, 2008, although he remained chairman. He was succeeded by Alan D. Schwartz.
A month later, Mr. Schwartz and a management committee reviewed a consulting firm’s report on how to deal with risk. But it was too late for the firm. In March 2008, the Federal Reserve pushed Bear Stearns into a takeover by JPMorgan Chase and provided $30 billion to make the rescue deal work.
Minutes of Bear Stearns Board Meeting
2007 Bear Stearns Fixed Income Overview
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