frog finance

Bear Stearns the latest victim of the credit crisis

14 Mar 2008

The US investment bank Bear Stearns has been bought by another Wall Street investemnt bank JP Morgan Chase for the measly sum of USD2 per share. Stocks in Bear Stearns have lost about 98% of their value in the last year. The news comes amid speculation that US interest rates are to be cut by 1% in order to try to stabalise the financial markets after heavy falls were incurred following the announcement from Bear Stearns.

Remarkably the USD2 per share sale price values the former giant of Wall Street at only USD236 which is amazingly less than the USD250m the L.A.Galaxy have paid out to capture the footballing icon David Beckham! As close as October the shares were valued at USD117 each. The rapid falls since then have all but wiped out the personal fortune of Stearn's Chief Executive Jimmy Cayne, once renouned as the richest boss of Wall Street thanks to his large shareholding in the bank.

What caused Bear Stearns to collapse?

Bear Stearns was a heavy investor in mortgage backed securities. The value of these securities has tumbled in recent months thanks to the The Sub-prime Crisis in the US. Bear Stearns was forced to take big losses on these securities. In addition as rumours spread among banking circles that they were running out of capital, banks became less and less willing to lend them money, which in turn only made their problem worse.

What are the ramifications of the Bear Stearns crisis?

The announcement of Bears Stearns receiving emergency funding and it's subsequent purchase by JP Morgan Chase sent shock waves around the global financial markets. News that one of the biggest and most prestigious banks was on the verge of collapse send stocks and shares plummeting. Since then many of the losses have been recovered however the ramification will be long felt. The sense that any of the other big firms could be next is greater than ever and the realisation of a sustained US economic slowdown seems to be becoming a reality.