History News Network

Departments

No, Bear Stearns Was Not ‘Rescued’

Over the weekend of 15th-16th March 2008, J P Morgan Chase bought Bear Stearns, at one time the world’s seventh largest investment firm, at a nominal price of $US2 per share or an approximate total of $US240 million. At close of trading on Friday (14th March), the shares were sold at around $US30 each. On the 1st March, the shares had been trading at around $US200 [recte] each. Bear Stearns’ shareholders obtained only 6% of what their shares had been worth on Friday, or 1% of their value a fortnight earlier.

Federal Reserve officials twisted J P Morgan’s arms -- which was why the latter ‘agreed’ to buy. Officials had to provide Morgan’s with a loan & a guarantee against the weakest ‘investments’ -- bad mortgages -- in the Bear Stearns portfolio. These dubious liabilities amount to some $US 33,000 million -- or some 138% of its total purchase price. Thus its unsound investments are one reason for the very very low price that Bear Stearns’ shareholders received -- even from J P Morgan’s & even after a Federal loan + guarantee.

In the absence of Federal Reserve intervention & arm-twisting, Bear Stearns would undoubtedly have had to cease trading. And no doubt it would’ve been taken over, eventually -- at an even lower price. All that govt officials could do was to shorten this time period, & possibly prevent Bear Stearns’ value from falling even further. But even the almighty Federal Reserve -- the world’s largest & most powerful central bank -- could not prevent the huge capital losses that Bear Stearns’ shareholders suffered. In short, even the Fed could not stop the de facto failure of one of the world’s largest investment companies.

What does all this signify? Even the US govt -- the world’s largest & most frightening -- is not & cannot be, omnipotent. True, the Fed’s officials did their best to paper over the cracks -- but that was all they could do.
--------------
The Guardian [London] 17th March 2008: ‘Fed takes emergency steps to prop up bank funding and calm nerves on Wall Street’

The Times [London] 17th March 2008: ‘Bear Stearns sold to JP Morgan Chase under Federal Bank pressure’