Wednesday, March 26, 2008

What happened at Bear Stearns?

Bear Stearns was the 5th largest US Investment Bank. It encountered difficulties and had to be bailed out by the US Federal reserve the equivalent to the Bank of England) and is the subject of merger at a ridiculously cheap price by rival JP Morgan.

How did all this occur?

The company had exposure to bad (sub-rime) mortgages in America. The mortgages were sold on using quite complicated financial products. Rumours began circulating that it also had problems with its prime (normal) mortgage investments.

With the rumours & a lack of action to deny them, investors began withdrawing money from Bear Stearns giving it sever cash flow problems and a spiralling crisis.

Tuesday, March 25, 2008

What is an Investment Bank?

Investment Banks have been widely discussed recently. Bear Stearns is one, as is Lehman Brothers. It begs the question, "what is an investment bank?"

Investment Banks don't offer services to normal retail customers like you or me nor do they have branches on the high street.

Basically they operate in 2 ways,
  1. Helping companies and governments raise money by issuing and selling shares in the organisation or debt such as corporate bonds.
  2. They also provide advice on mergers between companies & acquisitions