Uploaded March 2023 | Updated September 2026, 8 hours ago
Former Bear Stearns Chairman Ace Greenberg on the fall of Bears Sterns.
On March 16, 2008, Bear Stearns, the 85-year-old investment bank, narrowly avoids bankruptcy by its sale to J.P. Morgan Chase and Co. at the shockingly low price of $2 per share.
With a stock market capitalization of $20 billion in early 2007, Bear Stearns seemed to be riding high. But its increasing involvement in the hedge-fund business, particularly with risky mortgage-backed securities, paved the way for it to become one of the earliest casualties of the subprime mortgage crisis that led to the Great Recession.
In the early to mid-2000s, as home prices in the United States rose, lenders began giving mortgages to borrowers whose poor credit would otherwise have prohibited them from obtaining a mortgage.
With the housing market booming, Bear Stearns and other investment banks became heavily involved in selling complex securities based on these subprime mortgages, with little regard for how risky they would turn out to be.
After peaking in mid-2006, housing prices began to decline rapidly, and many of these subprime borrowers began defaulting on their mortgages. Mortgage originators started feeling the effects of the crisis first: New Century Financial, which specialized in subprime mortgages, declared Chapter 11 bankruptcy in April 2007.
In June, Bear Stearns was forced to pay some $3.2 billion to bail out the High-Grade Structured-Credit Strategies Fund, which specialized in risky investments like collateralized debt obligations (CDOs) and mortgage-backed securities (MBSs).
The following month, the firm revealed that the High-Grade fund and another related hedge fund had lost nearly all of their value due to the steep decline in the subprime mortgage market.
For the fourth quarter of 2007, Bear recorded a loss for the first time in some 80 years, and CEO James Cayne was forced to step down; Alan Schwartz replaced him in January 2008.
Barely two months later, the collapse of Bear Stearns unfolded swiftly over the course of a few days. It began on Tuesday, March 11, when the Federal Reserve announced a $50 billion lending facility to help struggling financial institutions. That same day, the rating agency Moody’s downgraded many of Bear’s mortgage-backed securities to B and C levels (or “junk bonds”).
Unlike a regular bank, which can use cash from depositors to fund its operations, an investment bank like Bear Stearns often relied on short-term (even overnight) funding deals known as repurchase agreements, or “repos.”
In this type of deal, Bear offered bundles of securities to another firm or an investor (such as a hedge fund) in exchange for cash, which it would then use to finance its operations for a brief period of time.
Former Bear Stearns Chairman Ace Greenberg on the fall of Bears Sterns.
On March 16, 2008, Bear Stearns, the 85-year-old investment bank, narrowly avoids bankruptcy by its sale to J.P. Morgan Chase and Co. at the shockingly low price of $2 per share.
With a stock market capitalization of $20 billion in early 2007, Bear Stearns seemed to be riding high. But its increasing involvement in the hedge-fund business, particularly with risky mortgage-backed securities, paved the way for it to become one of the earliest casualties of the subprime mortgage crisis that led to the Great Recession.
In the early to mid-2000s, as home prices in the United States rose, lenders began giving mortgages to borrowers whose poor credit would otherwise have prohibited them from obtaining a mortgage.
With the housing market booming, Bear Stearns and other investment banks became heavily involved in selling complex securities based on these subprime mortgages, with little regard for how risky they would turn out to be.
After peaking in mid-2006, housing prices began to decline rapidly, and many of these subprime borrowers began defaulting on their mortgages. Mortgage originators started feeling the effects of the crisis first: New Century Financial, which specialized in subprime mortgages, declared Chapter 11 bankruptcy in April 2007.
In June, Bear Stearns was forced to pay some $3.2 billion to bail out the High-Grade Structured-Credit Strategies Fund, which specialized in risky investments like collateralized debt obligations (CDOs) and mortgage-backed securities (MBSs).
The following month, the firm revealed that the High-Grade fund and another related hedge fund had lost nearly all of their value due to the steep decline in the subprime mortgage market.
For the fourth quarter of 2007, Bear recorded a loss for the first time in some 80 years, and CEO James Cayne was forced to step down; Alan Schwartz replaced him in January 2008.
Barely two months later, the collapse of Bear Stearns unfolded swiftly over the course of a few days. It began on Tuesday, March 11, when the Federal Reserve announced a $50 billion lending facility to help struggling financial institutions. That same day, the rating agency Moody’s downgraded many of Bear’s mortgage-backed securities to B and C levels (or “junk bonds”).
Unlike a regular bank, which can use cash from depositors to fund its operations, an investment bank like Bear Stearns often relied on short-term (even overnight) funding deals known as repurchase agreements, or “repos.”
In this type of deal, Bear offered bundles of securities to another firm or an investor (such as a hedge fund) in exchange for cash, which it would then use to finance its operations for a brief period of time.
