Transcript The Sale of Bear Stearns to J.P. Morgan Chase

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 billiondollar 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.