The Collapse of Bear Stearns and Lehman Brothers

Essay by AJ056College, UndergraduateA-, October 2009

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The current global economic crisis is by far the most serious since the 1929 Stock Market Crash, which started the infamous Great Depression of the early 1930s. The countries most affected by the current crisis are those that are the most industrialized and westernized, such as the United States. The three main causes behind the financial and economic crisis in the United States include the collapse of the housing market, a dramatic drop in stock market values and the bankruptcy or merger of some of the largest companies and financial institutions in the world. Bear Stearns and Lehman Brother were two of the biggest global financial institutions that directly impacted the global financial crisis with its collapse. Bear Stearns and Lehman Brothers collapse resulted from their heavy investments in the subprime mortgage market.

Bear Stearns, the nation's fifth-largest investment bank, began disclosing that it had sustained heavy losses tied to subprime loans extended to subprime borrowers amid the rising defaults in the subprime mortgage market.

The collapse in the subprime mortgage market has made the assets from two of its main hedge funds tied to the subprime loans the High-Grade Structured Credit Enhanced Leveraged Fund and the High-Grade Structured Credit Fund almost worthless. The losses in the two hedge funds caused sharp decreases in the overall market value of the subprime bonds when Bear Stearns leveraged their positions substantially before all the defaults. Bear Stearns failed to expect these sorts of price movements, therefore, had insufficient credit insurance to protect against the losses of the subprime bonds.

The large losses made the creditors who were financing this leveraged investment strategy with Bear Stearns uneasy, as they had taken subprime, mortgage-backed bonds as collateral on the loans. Bear Stearns' leverage was so high that a crisis of confidence developed, the...