Presentation on theme: "The Sale of Bear Stearns to J.P. Morgan Chase Zach Dickson, Anna Reid Fonville, Grant Harrison, Trevor Glenn 9/23/08."— Presentation transcript:
The Sale of Bear Stearns to J.P. Morgan Chase Zach Dickson, Anna Reid Fonville, Grant Harrison, Trevor Glenn 9/23/08
The History of Bear Stearns In 1923, Bear Stearns was founded as an equity trading house by Joseph Bear, Robert Stearns, and Harold Mayer with only $500,000 in capital. Bear Stearns opened its first international office in Amsterdam in 1955, and became a publicly traded company in 1985. In 2005-2007, Bear Stearns was recognized as the "Most Admired” securities firm in Fortune’s "America's Most Admired Companies" survey. The Bear Stearns Companies, Inc. was one of the largest global investment banks and securities trading and brokerage firms. The main business areas were: capital markets, wealth management and global clearing services.
The History of JP Morgan and Chase JP Morgan and Chase began as the New York Chemical Manufacturing Company, in 1823. They founded the Chemical Bank of New York. Mergers led to Chemical Bank becoming the largest bank in the United States. In 1996, Chemical acquired Chase Manhattan Corporation and took that name. In 2000, the company acquired J.P. Morgan & Co. and became JPMorgan Chase & Co. J.P. Morgan & Co. was founded as Drexel, Morgan & Co in 1895. The firm financed the US Steel Corporation, which became the world's first billion- dollar corporation. JPMorgan Chase, with assets of $1.8 trillion, is the second largest banking institution in the US, behind Citigroup. The company’s hedge fund is the largest hedge fund in the US. The firm operates in over 60 countries with over 180,000 employees.
Subprime Mortgages As house prices rose, fewer people could afford, so lenders created a new type of loan. A subprime loan is one in which banks would offer a high interest loan to the buyer. To finance these, the bank then sells the loan to investors, who expect a high return from the interest rate. Companies like Bear Stearns bought the loan packages, mixed them with other stocks and loans, and packaged them as complex securities for investors to buy. As long as housing prices soared, these loans went unquestioned. From a broker’s point of view, banks and brokers collected fees for closing the deals but faced no risk once they sold the loans to Wall Street.
Circumstances Trouble began with the failure of two of Bear Stearns largest hedge funds due to the subprime mortgage loan crisis. When the housing market fell, borrowers defaulted on their mortgages. As defaults piled up, the complex securities Wall Street had created crumbled. More and more lenders grew wary of making loans, especially if the collateral was mortgage-backed securities. Bear Stearns was one of the biggest underwriters of complex mortgage investments. Two of its hedge funds folded in July, shaking investor confidence. Fund assets decreased because of the unpaid defaults. The buyout was necessary because the company was so intertwined in the economy that its collapse would have spelled doom for many others. The fall of Bear Stearns represents more than just a Wall Street crisis, it represents a myriad of problems stemming from other sectors of the economy as well.
Fall of Bear Stearns In 2007, the company was severely hurt by the subprime mortgage crisis. On March 14, 2008, Bear Stearns lost 47% of market share, leaving investor confidence shaken. The Federal Reserve Bank provided a 28-day emergency loan to increase the firm’s capital. This loan failed, and the firm and was sold to JPMorgan Chase $10/share, a very low amount compared to the 52 Week High price of $133.20/share. JP Morgan Chase first offered to buy the firm at a price of $236 million, or $2/share, on March 16, 2008. However, that offer was raised to $1.1 billion on March 24 to calm upset shareholders. By June 6, the merger was complete. Bear Stearns is now known as "Bear Stearns Wealth Management at JP Morgan and Chase”.
Bear Stearns Alliances Bear Stearns had several important alliances, including agreements with CITIC Securities, Co., Ltd., GlobeSecNine, Inc., and Giuliani Partners. The CITIC agreement was formed to develop capital markets and businesses in China, and to foster cross-investment between the companies. The GlobeSecNine, Inc., agreement was created to pursue private equity investment opportunities in the homeland defense and security sectors. Also, Bear Stearns formed an alliance with Giuliani Partners to invest in homeland defense and security in 2003.
JP Morgan Chase Alliances JPMorganChase has agreements with companies such as SHPS, Inc. and Fidelity National Information Services. The agreement with SHPS, Inc., an integrated health management provider, was designed to offer a full-featured health savings account (HSA) that combines the strengths of the organizations. HSA provides health savings account services as well as debit card and transaction services, and a Chase custodial account. The agreement with Fidelity National Information Services created a solution for item exchange between financial institutions, allowed by the Check 21 Act (a digital copy of a check may be created, eliminating the need for the physical document).
Competitors of the Companies Banking is a very competitive business, since demand for services depends on economic activity and interest rates. Various banks will profit depending on their marketing skills, risk management, and efficiency. Top Competitors of JP Morgan Chase include Bank of America (based in Charlotte, NC), Citigroup (New York, NY), and Merrill Lynch (New York, NY). Top competitors of Bear Stearns include Goldman Sachs, Lehman Brothers, and Merrill Lynch.
Aftereffects The benefits of this deal include the growth of JPMorganChase. Over $1 billion dollars of after tax earnings are expected in the next 12-18 months. Also, most of Bear Stearns' clients followed their accounts to the new location. The drawbacks from this deal include general unease with the federal loan given to Bear Stearns. Common belief is that the government should not participate in private business. Also, bailouts cost taxpayers money. Lastly, the sale did not calm the financial sector as was expected, and Morgan Stanley and Goldman Sachs now face government scrutiny as well.