Sunday, March 16, 2008

The “Collapse” of Bear Stearns

The recent near fatal collapse of investment company Bear Stearns is not a surprise. In fact, it was probably years in the making, with greedy financiers capitalizing on the real estate boom and the Fed continuing to lower interest rates to ridiculously low levels. So low, in fact, that banks and investment groups were loaning money to people that didn't have jobs.

Bear Stearns got caught in this mess by getting in so deep with the real estate market that when it started to become undone, Bear Stearns had little to protect itself. Then, when it’s banking investors decided to take their money out of Bear as they had little confidence in them, the company found itself on the brink of insolvency. Of course, the Fed (Federal Reserve) comes to the rescue. They had to; otherwise the entire banking system may have faced a domino effect collapse.

Barrons is reporting “Wall Street hasn't faced a crisis of this magnitude since the implosion of the giant hedge fund Long Term Capital Management in 1998. And the news isn't expected to improve any time soon. This week Bear, Goldman Sachs (GS), Lehman Brothers (LEH) and Morgan Stanley (MS) are slated to report results for their first quarter, ended in February. The results won't be pretty”

How could a company like this get into a mess like this? My thought it is greed, plain and simple. They took the words of fictional movie character Gordon Gekko a little too seriously, when he said in the 1987 movie Wall Street, “Greed is good.” Well, greed is not good, because companies like Bear Stearns were so blinded by the real estate bubble – caused by low interest rates – that they couldn’t see that the bubble was bursting around them and they had no safety net.

But I also blame the Fed. They lowered interest rates so low that banks made risky loans to virtually anybody with a pulse. People were getting interest-only loans for price-inflated homes, with adjustable rate mortgages. Problem is, people didn’t realize that those adjustable rates could go UP. Yet, the Fed continued to lower rates, causing money to be so cheap that inflation started to run rampant. So now the Fed has to bail out Bear Stearns and who knows what other financial institutions down the road. I suppose we are lucky that the Fed can bail them out, but it makes me wonder if we weren’t – or aren’t – a breath away from a depression-like era. The great depression of 1929 started because of over speculation on the stock market. Now we may be faced with a similar situation because of over speculation in the real estate market.

I worked for a company who was owned for a short time by Bear Stearns in the 1980s. They were greedy then, taking out every single dime of the company they could, and cutting costs to the point that there was almost no company left to run. We were lucky that someone came along and bought us from Bear and allowed us to actually run the business. In a way, I’m glad to see their fall from grace. But I’m sorry that the Fed has to bail them out, and I’m also sorry that it may still create a huge ripple effect in the banking industry.

These are very uncertain financial times for everyone. Bear Stearns may be only the tip of the iceberg. Stay informed, and watch your investments carefully. Don’t be like Bear Stearns and let greed blind you to any financial peril ahead.

NOTE: It was reported that late in the day Sunday March 16, J.P. Morgan purchased Bear Stearns - for $2 a share. The big losers here are shareholders; Bear opened on Friday March 14 at $54.24, and closed that day at $30. Hopefully some of the executive at Bear lost a lot of money in their own stock holdings.

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