Five years ago this week, Bear Stearns was sold to JPMorgan Chase at a fire-sale price, after the overnight financing keeping the investment bank afloat dried up.
On Friday March 14, 2008, the firm secured a 28-day loan from JPMorgan and thought it would receive access to the New York Federal Reserve's discount window for additional funding. Those hopes were dashed before the weekend was out though, and by that Sunday the firm had been sold to JPMorgan for $2, a price that was ultimately raised to $10 two weeks later. (See "JPMorgan Sweetens Bear's Bitter Pill.")
The sale represented the Federal Reserve dodging a bullet – it managed to steer the firm into the hands of Jamie Dimon and JPMorgan by backstopping on a portfolio of nearly $30 billion in mortgage-backed securities.
Of course, averting that crisis did little to prevent the next, as Lehman Brothers went down six months later and would-be-rescuers found they couldn't secure "the Jamie Dimon deal" from the Fed. Bank of America would take over Merrill Lynch and Barclays would scoop up much of Lehman's U.S. business after the bankruptcy filing, but neither did so with the degree of support JPMorgan received for its rescue effort months earlier. Goldman Sachs and Morgan Stanley, the last survivors among the five major Wall Street investment banks, would transform into bank holding companies in what amounted to the end of an era begun almost a hundred years earlier.
The Bear Stearns saga also produced one of the most indelible images of the financial crisis (the one at the top of this post): a $2 bill stuck on the front door of Bear Stearns headquarters.
JPMorgan did not respond to a request for comment on what the takeover of Bear Stearns has done for its business, but a tour through Dimon’s annual shareholder letters illustrates the evolution of the purchase.
In the 2008 leter, Dimon praised JPMorgan’s employees for rapidly closing the deal by the end of May and stressed his bank’s role as a savior:
Under normal conditions, the price we ultimately paid for Bear Stearns would have been considered low by most standards. But these were not normal conditions, and because of the risk we were taking, we needed a huge margin for error. We were not buying a house – we were buying a house on fire.
By 2009, Dimon was hammering home the steps JPMorgan had taken to use its global footprint to leverage the Bear Stearns businesses, including expanding the mostly-domestic prime services business to Europe and Asia.
In his 2010 letter, Dimon reflected on the strength of JPMorgan’s balance sheet, noting the bank had managed to acquire both Bear Stearns and Washington Mutual in 2008 with only a modest drop in its capital ratios.
Dimon’s 2011 letter used the Bear and WaMu buys to take a dig at the Federal Reserve’s stress tests (emphasis in original):
Keep in mind that during the real stress test after the collapse of Lehman Brothers, our capital levels never went down, even after buying $500 billion of assets through the acquisitions of Bear Stearns and WaMu.
Bear and WaMu also became a convenient scapegoat for some of JPMorgan’s mortgage issues. While Dimon acknowledged the bank wasn’t perfect during the freewheeling days before the subprime meltdown, he also pinned a chunk of the blame on its 2008 acquisitions.
“Many of our problems wereinherited from Bear Stearns and WaMu. Even our subprime mortgages outperformed most other subprime mortgages. Early in the crisis, we also stopped dealing with mortgage brokers, some of whom underwrote the worst of the mortgages and probably missold mortgages more than most.”
JPMorgan is still sorting through some of the legacy costs from the Bear Stearns acquisition, having agreed to a regulatory settlement on mortgage-backed securities just this past November. (See "Ghost Of Bear Haunts JPMorgan.") Of course, it isn't just the echoes of Bear producing headaches for the bank; current and former executives are due to testify at a Senate hearing this week into the causes of the London Whale trading disaster that resulted in a multi-billion loss last year.
Last week, I spoke with a veteran of Bear Stearns’ fixed-income group, who asked not to be identified because he did not have authorization from his current firm to speak on the record. But he did agree to share his memories of the turbulent demise of the 85-year-old firm with Forbes:
I was out of the office for a couple of days right as things were falling apart, and I remember calling into my deskmate and asking where the stock was. He said $37 and I couldn’t believe it. It was nearly cut in half in just a few days.
Then we get word that we’re borrowing from JPMorgan and it felt like everything might be ok. Then all of a sudden the Fed decided it’s not ok.
I remember being there on the Sunday, when the head of our group told us, with tears streaming down his face, that we got sold for two dollars.
Things seemed to happen pretty quickly. It was like [then-CFO] Sam Molinaro said – we thought we had 28 days with the Fed loan, then all of a sudden it was 'get the deal done by the weekend.'
We were the sacrificial lamb for the industry. I do feel worse for the Lehman folks though – they didn’t even get the $2 and their CEO had the advantage of seeing what happened to us, and access to the Fed window.
It was a great place, there was a great camaraderie and a lot of us still talk too each other.
Everyone moves on – most of us have done fine. There’s a good group of people who have stuck together and we still have mini reunions. Sometimes I have a question about something and I call up a Bear Stearns guy at another shop to explain it; sometimes I get the call.
There are a lot of people to fault for the Bear breakdown. It wasn’t just one guy, but I worked there for over 20 years and never heard a good word about Jimmy [Cayne]. Warren [Spector, co-president until a pair of hedge funds blew up in 2007, starting the company’s collapse], was tough, but brilliant, Ace [Greenberg, longtime CEO] was great, Alan [Schwartz, CEO in 2008 and now head of Guggenheim Partners] was a great investment banker.
I can’t believe it’s been 5 years, but my 21 years there went by in the blink of an eye.
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