The Collapse Of Bear Stearns And Lehman Brothers

2084 words - 8 pages

The current global economic crisis is by far the most serious since the 1929 Stock Market Crash, which started the infamous Great Depression of the early 1930s. The countries most affected by the current crisis are those that are the most industrialized and westernized, such as the United States. The three main causes behind the financial and economic crisis in the United States include the collapse of the housing market, a dramatic drop in stock market values and the bankruptcy or merger of some of the largest companies and financial institutions in the world. Bear Stearns and Lehman Brother were two of the biggest global financial institutions that directly impacted the global financial crisis with its collapse. Bear Stearns and Lehman Brothers collapse resulted from their heavy investments in the subprime mortgage market.Bear Stearns, the nation's fifth-largest investment bank, began disclosing that it had sustained heavy losses tied to subprime loans extended to subprime borrowers amid the rising defaults in the subprime mortgage market. The collapse in the subprime mortgage market has made the assets from two of its main hedge funds tied to the subprime loans the High-Grade Structured Credit Enhanced Leveraged Fund and the High-Grade Structured Credit Fund almost worthless. The losses in the two hedge funds caused sharp decreases in the overall market value of the subprime bonds when Bear Stearns leveraged their positions substantially before all the defaults. Bear Stearns failed to expect these sorts of price movements, therefore, had insufficient credit insurance to protect against the losses of the subprime bonds.The large losses made the creditors who were financing this leveraged investment strategy with Bear Stearns uneasy, as they had taken subprime, mortgage-backed bonds as collateral on the loans. Bear Stearns' leverage was so high that a crisis of confidence developed, the investors required Bear Stearns to provide additional cash on their loans because the collateral subprime bonds were rapidly falling in value. Unfortunately, because the funds had no cash, they needed to sell bonds in order to generate cash, which ultimately became public knowledge in the hedge fund community that Bear Stearns was in trouble. As prices on subprime bonds fell, the funds experienced losses, which cause it to sell more subprime bonds, which lowered the prices of the subprime bonds, which caused them to sell even more bonds. In time investors began withdrawing money from Bear Stearns and their customers stopped doing business with them.Bear Stearns' trouble began with the housing bubble. As home prices continue to soar, fewer people could afford to buy. In response, banks and other lenders created new types of mortgages, which made loans affordable to people who normally would not qualify for a conventional 30-year mortgage. Bear Stearns' first mistake was be heavily invested in the subprime mortgages. The beauty of these subprime mortgages, at least...

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