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I have friends who work at Bear Stearns (NYSE: BSC) and one of them in a very senior capacity. Believe me, they are not laughing and this is actually quite a sad moment for them and their colleagues. Bear Stearns had an 85-year history having come through the Great Depression and several recessions. Bear was a proud trading house and took great pride in its trading prowess. Sure, the naysayers will argue that Bear bit off more than it could chew and that Bear was a greedy Wall Street firm. But there is more to the story and it should be told.
Bear Stearns was the second-largest packager of mortgage backed securities only surpassed by Lehman Brothers (NYSE: LEH). As we saw these past couple of years, the quality scale on mortgage-backed securities slid down to lousy, risky sub-prime mortgages. But keep in mind that the $400 billion worth of securities that Bear Stearns underwrote and managed were not all lousy credit risks. The biggest part, more than $300 billion worth were of the highest quality. Bear Stearns facilitated a market that needed facilitating!
In the old days, only major banks underwrote mortgages and they typically kept and serviced the loans. But as the American population and economy expanded these past 20 years, mortgage companies were formed and needed to "sell the loans off" as they did not possess the capital base of say a Bank of America (NYSE: BAC) or a Wells Fargo (NYSE: WFC). Firms like Bear Stearns became adept at packaging these loans and re-selling them to major pension funds and hedge funds globally.
The problem ensued when credit requirements and quality went to lower levels -- sub-prime. Borrowers were scrambling to get in on the real estate ladder as homeowners bought the song and dance that home values were poised to run up 25%+ per year. Don't worry about the mortgage payment -- in fact here is a teaser rate to get you going.
Bear Stearns will provide the pundits with a lot of stories as we all begin to question what happened? And what happened in just 2 short days. JP Morgan (NYSE: JPM) has picked off for an absolute song 85 years worth of expertise and relationships in many profitable investment banking businesses -- except mortgage underwriting and packaging. To think JP Morgan is paying for Bear Stearns what Bear Stearns use to make in one month's profit.
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Reader Comments (Page 1 of 1)
3-17-2008 @ 3:58PM
Lawrence C. Vitale said...
The sad part is the unscrupulous Real Estate brokers and mortgage lenders go for the most part untouched. Bear and Lehman belived in the "primary underwriting " performed by these so called professionals
3-18-2008 @ 3:13PM
HAJO said...
Sorry Mr. Vitale.....Lenders were underwriting
to credit standards and guidelines which both
Bear and Lehman, and or their subprime subsidiaries, were placing an emphasis. It was
Wall Street firms whom created their own death
knell with product offerings such as "Stated
Income" and "No Doc" programs. Can you imagine a loan wherein if income verifications were
to be placed in a file, they would not fund it? This
was exactly their approach with the "Stated Income" application.
I ran a major subprime company for years....I am
so glad that I retired in 1996 prior to the street
firms pursuing such wildly absurd loans which were
made to very risky borrowers......Loans which
are now causing major financial pressures and the
demise of the likes of Bear Stearns....
3-18-2008 @ 6:33PM
bob said...
best advertisement for a free market is when some insider big boys lose their shirts