Bear, Stearns & Co., Inc.

Bear, Stearns & Co., Inc., now a subsidiary of JPMorgan Chase, was a global investment banking, securities trading and brokerage firm.

Role in the financial crisis
Bear Stearns, founded in 1923, was the fifth-largest American investment bank at the time of its demise. A pioneer in securitization and the asset-backed securities markets, the firm's affiliates became heavily involved in trading in complex derivatives backed by home mortgages. As losses mounted the company "doubled down," increasing its exposure. They “leveraged” as much as 35 times its available money to trade but in 2007 a new fund borrowed at 100 times its cash.

After a March 2008, Federal Reserve loan the company was sold to JPMorgan Chase.

Bear Stearns' collapse and sale occurred at the beginning of the 2008 financial meltdown of Wall Street and was a "red flag" of the financial trouble which came to a head in September 2008, leading to thee global financial crisis and ensuing recession.

High leverage
In 1975, the SEC’s trading and markets division ruled that investment banks must maintain a debt-to-net capital ratio of less than 12 to 1. In 2004, following extensive lobbying by the investment banks, the SEC under chairman Christopher Cox authorized five investment banks to develop their own net capital requirements. This enabled investment banks to push borrowing ratios to as high as 40 to 1. These five investment banks were Goldman Sachs, Morgan Stanley, Lehman Brothers, Bear Stearns, and Merrill Lynch. This very high debt-to-reserves helped lead to the financial crisis of 2008 by weakening the ability of these institutions to recover from losses incurred when the risky CDO and CDS bets failed.

Lee A. Pickard, who had been Director of the SEC’s Division of Market Regulation when the 1975 12-1 rule was ordered, said of the change, "The SEC modification in 2004 is the primary reason for all of the losses that have occurred."

At the time of its collapse Bear Sterns was leveraged at a ration of 35.5 to 1.

SEC complicity
A 2008 Security and Exchange Commission (SEC) Inspector General's report found that the SEC “was aware ... that Bear Stearns’ concentration of mortgage securities was increasing for several years and was beyond its internal limits.” Nevertheless, it “did not make any efforts to limit Bear Stearns’ mortgage securities concentration.” The IG said the SEC was “aware that Bear Stearns’ leverage was high;” but made no effort to require the firm to reduce leverage “despite some authoritative sources describing a linkage between leverage and liquidity risk.” Furthermore, the SEC “became aware that risk management of mortgages at Bear Stearns had numerous shortcomings, including lack of expertise by risk managers in mortgage backed securities” and “persistent understaffing; a proximity of risk managers to traders suggesting a lack of independence; turnover of key personnel during times of crisis; and the inability or unwillingness to update models to reflect changing circumstances.”

Campaign contributions
James E. Cayne, Chairman and Chief Executive Officer of Bear Stearns, is a Bush Pioneer having raised at least $100,000 for Bush in the 2004 presidential election.

Bear Stearns gave $127,500 to federal candidates in the 2006 election through its political action committee - 25% to Democrats and 75% to Republicans.

Other political campaign contributions:
 * P. Nicholas Hurtgen, Bush Pioneer, Texans for Public Justice, accessed August 2007.
 * Douglas R. Korn, Bush Pioneer, Texans for Public Justice, accessed August 2007.
 * Peter J. Murphy, Bush Pioneer, Texans for Public Justice, accessed August 2007.


 * Bear Stearns & Co., Inc Political Campaign Committee FKA Bear Stearns PCC], Candidate Contributions, Congress.org: 2003-2004 Campaign Cycle: Total contributions: $66,500; and 2005-2006 Campaign Cycle: Total contributions: $79,000.
 * Bear Stearns & Co Inc Political Campaign Committee FKA Bear Stearns PCC Political Action Committee, Campaign Contribution Details '04 Election Cycle, CampaignMoney.com.

Lobbying
The company spent $780,000 for lobbying in 2006. $420,000 of this went to three lobbying firms - Venable LLP, Steptoe & Johnson, and Angus & Nickerson.

Stock fraud
One of the nation's largest investment banking and brokerage firms, Bear Stearns & Co. is facing a number of securities and investment fraud charges. According to reports, in an effort to increase profits, Bear Stearns management supported fraudulent actions committed by a number of its clients, including stock manipulation and illegal trades. Stearns recently agreed to pay fines of $80 million as part of a settlement with the Attorney General of the State of New York.

"Stock fraud allegations involving Bear Stearns include the following securities" (as stated):


 * Agilent Technologies
 * Ancor Communications
 * Andrx Communications
 * CacheFlo
 * Digital River
 * JNI
 * Pets.com
 * Sonicwall
 * Vixel

Contact information
Web: http://www.bearstearns.com

Related SourceWatch articles

 * banking
 * Jeremy W. Sillem

Profiles

 * Profile and news links for Bear, Stearns & Co., Inc., Google Finance.

External resources

 * Sold Out - How Wall Street and Washington Betrayed America, Consumer Education Foundation, March, 2009.

External articles

 * Bryan Burrough, Bringing Down Bear Stearns, Vanity Fair, August, 2008.


 * William D. Cohan, Inside the Bear Stearns boiler room, CNN Money, March 4, 2009.


 * Steve Schultze and Daniel Bice, "Big Thompson donors do well in landing business with state. Records show correlation between givers, receivers in bond deals, road work," Milwaukee Journal Sentinel, November 3, 1997.
 * "McCain's Money," Washington Post, 2007. re John McCain: U.S. presidential election, 2008