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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Please note:

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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"Given the exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain."1

- Ben Bernanke, Federal Reserve Chairman, in April 2008.

"You get to where people can't trade with each other. If the Fed hadn't acted this morning and Bear did default on its obligations, then that could have triggered a very widespread panic and potentially a collapse of the financial system."2

- James L. Melcher, President of Balestra Capital3, in March 2008.

Introduction

On March 17, 2008, US-based JP Morgan Chase (Morgan), a leading wholesale financial services firm, announced that it had entered into a deal to buy the troubled investment bank Bear Stearns (Bear). Morgan agreed to buy Bear in a stock swap deal where it valued Bear's share at US$ 2.52. As per the agreement, each Bear share would be swapped with 0.05473 of Morgan's share. The price at which Morgan announced that it would buy Bear's shares came as a shock to financial experts as it was at a discount of over 90% to Bear's closing price of US$ 30 on its previous trading session, March 14, 2008 (Refer to Exhibit I for Bear's Stock Price Chart). However, on March 24, 2008, Morgan revised its bid from US$ 2.52 to US$ 10 per share as it could not get the approval of Bear's shareholders for its previous bid.

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1] "Bernanke says Damage from Bear Stearns Failure would Have Hit Broad Economy," www.forbes.com, April 03, 2008.

2] Jenny Anderson and Vikas Bajaj, "A Wall Street Domino Theory,"www.nytimes.com, March 15, 2008.

3] Balestra Capital is a New York based hedge fund.


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