Bear Stearns Bailout

Bear Stearns Bailout

“The Fed did not bailout Bear at taxpayer expense, but enabled – as it is mandated – the financial markets to continue to function. History will call the Fed’s action the right move at the right time”, says Jeremy Siegel, Ph.D. The Bear Stearns Company began a financial meltdown in July 2007. By March 2008, it was ready to file Chapter 11 bankruptcy. Some people believe that the Federal Reserve should not have stepped in to bailout Bear Stearns because it was rewarding reckless business behavior and Bear should have been left to file bankruptcy. The deal of Bear Stearns was not a government bailout; it was rather a loan to preserve jobs, homes, savings, the economy, the shareholders of Bear, and the financial markets on Wall Street.

There are many aspects to the Bear Stearns financial problem. Bear Stearns, founded in 1923, is an investment bank that specialized in subprime mortgage loans. These loans are usually given to people who have a below average credit score and could not be financed elsewhere. In return, these loan recipients pay a higher mortgage interest rate (Siegel 1). Bear Stearns has over 14,000 employees in 34 branches in the United States and 14 international branches. As of November 2007, the company’s client account was $288.5 billion from providing trade and clearing services. In July 2007, two of Bear Stearns hedge funds that were invested in subprime mortgages began to fail, along with the housing market (Smith 1). Bear Stearns was facing bankruptcy and the economy was headed in a negative financial direction. The Bear Stearns problem coexists within their company and Wall Street. Bear Stearns began to break new ground in the 1980s housing market and was largely involved in the administering of subprime mortgages during the housing boom. The prices of these subprime mortage sececurities began to fall in 2007 when people could not longer afford to pay their mortgages, and Bear Stearns’ lenders began to...