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Bear Stearns Essay

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Bear Stearns did not line up sufficient liquidity to withstand this crisis in 2008. Two subjects was the problem. The first was that the securities that Bear Stearns had its capital tied up in were risky assets. In such a crisis, the liquidity will disappear for assets. If they took measures before and kept their assets at a better credit quality, this problem wouldn’t occur as harsh as it did.
And the second problem occurred when Bear sterns was extremely leveraged comparing to other investment banks. When a company is highly leveraged it’s because they are very confident about their investments long term and in the short term, but that was not the case for bear sterns as we will get into. Their liquidity issues were caused by the …show more content…
CDS’s are the most widely traded form of the derivatives. They are backed by two parties’ weather they will default or not. CDS’s are being sold as an insurance and the can be considered as Insurance fraud. When they had no credit worthy borrowers they started to get into the ones that weren’t credit worthy in the subprime mortgages. So the increase in overall risk exposure, they purchased insurance on the movements in the credit markets. And they profited because of the credit problem and causes the bonds to drop value and this makes

them hedging away the risks. So they removed the risky mortgages off of their books and put them into a bundle wear they can sell to other investors and the best of it is that it was insured with the CDS’s. When the borrowers stop paying, the investors stop buying and that led to no one buying the junk bonds.

SO that left the billions of dollars of securities that were worthless. As investors fled from bear sterns JP Morgan chase wanted collateral. Bear sterns managers tried to get more time to get the situation to get better and invest more money. But we will get into the managers section

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