Saturday, March 29, 2008
Tweet[IWS] CRS: BEAR STEARNS: CRISIS and "RESCUE" for a MAJOR PROVIDER of MORTGAGE-RELATED PRODUCTS [26 March 2008]
IWS Documented News Service
_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
________________________________________________________________________
Congressional Research Service (CRS)
Order Code RL34420
Bear Stearns: Crisis and "Rescue" for a Major Provider of Mortgage-Related Products
Updated March 26, 2008
Gary Shorter, Specialist in Business and Government Relations, Government and Finance Division
http://assets.opencrs.com/rpts/RL34420_20080326.pdf
[full-text, 12 pages]
Summary
In March 2008, Bear Stearns, the nation's fifth largest investment banking firm,
was battered by what its officials described as a sudden liquidity squeeze related to
its large exposure to devalued mortgage-backed securities. On March 14, the Federal
Reserve System announced that it would provide Bear Stearns with an unprecedented
short-term loan. This was rendered essentially moot when, on March 16, a major
commercial bank, JP Morgan Chase, agreed to buy Bear Stearns in an exchange of
stock shares for about 1.5% of its share price of a year earlier, a price that translated
to $2/share. To help facilitate the deal, the Federal Reserve agreed to provide special
financing in connection with the transaction for up to $30 billion of Bear Stearns's
less liquid assets.
During the weekend of March 22, in the wake of criticism from Bear
shareholder and employees (employees own about one-third of the firm's outstanding
stock) over the $2/share price, Bear Stearns and JP Morgan renegotiated the terms
of the deal: JP Morgan will purchase 95 million newly issued shares of Bear's
common stock at $10/share in a stock exchange. In response to the changed deal
conditions, the Fed altered the terms of its financial involvement: it got JP Morgan
to agree to absorb the first $1 billion in losses if the collateral provided by Bear for
a loan proves to be worth less than Bear Stearn's original claims. Instead of its
original agreement to absorb up $30 billion, the Fed will now be responsible for up
to $29 billion.
The Fed's unprecedented role has generated a widespread debate on the
implications of such an intervention. Some argue that the help made sense in the
interest of avoiding potential systemic financial risk. Others argue that it tells the
market that it is willing to help a large and failing financial enterprise, setting a bad
precedent in terms of corporate responsibility.
This report will be amended as events dictate
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Some Background on Bear Stearns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Bear Stearns and the Initial Fed "Rescue" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
JP Morgan Initially Agrees to Acquire Bear Stearns with Fed Assistance . . . . . . 5
The Amended Buyout Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Altered Terms for the Fed and the Debate over Moral Hazard and
Systemic Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
______________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky
Director, IWS News Bureau
Institute for Workplace Studies
Cornell/ILR School
16 E. 34th Street, 4th Floor
New York, NY 10016
Telephone: (607) 255-2703
Fax: (607) 255-9641
E-mail: smb6@cornell.edu
****************************************
_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
________________________________________________________________________
Congressional Research Service (CRS)
Order Code RL34420
Bear Stearns: Crisis and "Rescue" for a Major Provider of Mortgage-Related Products
Updated March 26, 2008
Gary Shorter, Specialist in Business and Government Relations, Government and Finance Division
http://assets.opencrs.com/rpts/RL34420_20080326.pdf
[full-text, 12 pages]
Summary
In March 2008, Bear Stearns, the nation's fifth largest investment banking firm,
was battered by what its officials described as a sudden liquidity squeeze related to
its large exposure to devalued mortgage-backed securities. On March 14, the Federal
Reserve System announced that it would provide Bear Stearns with an unprecedented
short-term loan. This was rendered essentially moot when, on March 16, a major
commercial bank, JP Morgan Chase, agreed to buy Bear Stearns in an exchange of
stock shares for about 1.5% of its share price of a year earlier, a price that translated
to $2/share. To help facilitate the deal, the Federal Reserve agreed to provide special
financing in connection with the transaction for up to $30 billion of Bear Stearns's
less liquid assets.
During the weekend of March 22, in the wake of criticism from Bear
shareholder and employees (employees own about one-third of the firm's outstanding
stock) over the $2/share price, Bear Stearns and JP Morgan renegotiated the terms
of the deal: JP Morgan will purchase 95 million newly issued shares of Bear's
common stock at $10/share in a stock exchange. In response to the changed deal
conditions, the Fed altered the terms of its financial involvement: it got JP Morgan
to agree to absorb the first $1 billion in losses if the collateral provided by Bear for
a loan proves to be worth less than Bear Stearn's original claims. Instead of its
original agreement to absorb up $30 billion, the Fed will now be responsible for up
to $29 billion.
The Fed's unprecedented role has generated a widespread debate on the
implications of such an intervention. Some argue that the help made sense in the
interest of avoiding potential systemic financial risk. Others argue that it tells the
market that it is willing to help a large and failing financial enterprise, setting a bad
precedent in terms of corporate responsibility.
This report will be amended as events dictate
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Some Background on Bear Stearns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Bear Stearns and the Initial Fed "Rescue" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
JP Morgan Initially Agrees to Acquire Bear Stearns with Fed Assistance . . . . . . 5
The Amended Buyout Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Altered Terms for the Fed and the Debate over Moral Hazard and
Systemic Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
______________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky
Director, IWS News Bureau
Institute for Workplace Studies
Cornell/ILR School
16 E. 34th Street, 4th Floor
New York, NY 10016
Telephone: (607) 255-2703
Fax: (607) 255-9641
E-mail: smb6@cornell.edu
****************************************
# posted by SBasefsky : 1:05 PM
