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.

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