Why was Bear Stearns sold out just for $2 a share when just sometime back its share price was as high as $150 per share?
I’ll keep it short and simple. It was the subprime mortgage crisis that led to the fall of Bear Stearns.
Related: My view of Subprime Mortgage Crisis
How the 85 year bank Bear Stearns fell prey to subprime mortgage crisis? The real culprits are various investment banks – including Bear Stearns itself. These banks have to do business – with customers, high net worth individuals, with governments and with each other. They keep coming out with new and “innovative(?)” financial securities and instruments, which they trade with each other. In case of Subprime mortgage crisis, the same investment banks came out with a nice piece of mortgage backed financial securities.
What has happened is as follows: Subprime mortgages (basically loans to credit less individuals) were offered by the various real estate mortgage lenders (including different arms of big investment banks). Since they were offering loans, they required money to back them up. Hence these banks came out with “mortgage backed securities” and sold them to each other. These were the financial instruments, which had the guarantee of the real estate or houses that were sold through subprime mortgages.
However, when the subprime mortgage loan borrowers defaulted, these mortgage backed securities also went for a tailspin. The culprits were these investment banks who failed to realize the risks involved in these subprime mortgage backed securities and sold them aggressively. Bear Stearns is just one example of how one bank with 85 year old reputed history has fallen prey to market conditions.
Let’s also not forget what has happened with Northern Rock bank of UK.
| Hopefully, this will be a new lesson to people who blindly keep on buying shares believing that banks are safe and have proper risk management systems. | Table of Contents |
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