The Fall of Bear Stearns

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Case Details:

Case Code : FINC053
Case Length : 18 Pages
Period : 2007-2008
Pub. Date : 2009
Teaching Note :Not Available
Organization : Bear Stearns
Industry : Banking & Financial Services
Countries : France

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Introduction Contd...

This deal rung the curtains down on the 85-year-old investment bank, the fifth largest in the US and one of the major underwriters of mortgage backed securities.

According to the analysts, even though Bear had huge exposures to the sub-prime mortgage related securities, this was not the major reason behind its fall.

The trouble was actually triggered by a rumor in the market about the liquidity crisis at Bear on March 10, 2008. The rumor caught Bear's management unawares and as did the significant fall in Bear's share price despite it having US$ 18 billion in cash reserves.

Even after Bear's CEO Alan Schwartz (Schwartz) assured the markets that there was no liquidity crisis in the company, the stock declined by 11% to end at US$ 62.3 on the New York Stock Exchange on March 10, 2008, its lowest level since March 2003.4

The US Federal Reserve (Fed) announced that it would lend US$ 200 billion to Wall Street banks starting from March 27, 2008. Bear's stock closed at US$ 62.97 on March 11, 2008, rising by 1.1%.

The liquidity at Bear came down to US$ 11.5 billion on March 11, 2008, as compared to US$ 18 billion on March 10, 2008, as some of the lenders withdrew their funds following the rumors of a liquidity crisis.

The following day, the liquidity position of Bear increased to US$ 12.4 billion but the stock fell by 2% to close at US$ 61.58...

Excerpts >>

4] Jeff Kearns and Yalman Onaran, "Bear Stearns Denies Rumors on Liquidity after Shares Plummet,", March 10, 2008.

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