Can other firms avoid Bear Stearns' fate?
NEW YORK -- In the wake of Bear Stearns' shotgun marriage to JPMorgan Chase at $2 a share, investors might want to know how a financial institution with nearly $400 billion in assets and $12 billion in shareholder equity went from normalcy to near bankruptcy in just seven days.
The key element in Bear's collapse is not the assets listed on its balance sheet, which totaled $395 billion at the end of 2007, but the portion of those assets that was in cash or cash equivalent: $34 billion.
When Bear's customers and clients started taking their cash out of the firm early this year, or demanding better terms on financing, Bear found itself in a classic fix: It needed to sell assets to raise more cash, but the assets it held on its books — many of which consisted of mortgage-backed securities — were difficult to sell.
According to Peter Schiff, president of Euro Pacific Capital, Bear found itself in a situation comparable to a beleaguered homeowner.
"You have a mortgage of $400,000, and one day you get a call from the bank and they say, 'We need all our money back.' If they say, 'Give me your money or we're taking your home,' you're in trouble," Schiff says. Bear found itself in just such a situation last week.
In January and February, a smattering of the 900 hedge funds that used Bear for prime brokerage services made inquiries at other firms, putting out feelers about whether they could shift their business there on short notice.
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