Bear Stearns, as an active participant in the $330 billion subprime mortgage industry, was not immune from this collapse, and as of the three month period ended February 28, 2007, the Company reported on SEC Form 10-Q, that it had suffered approximately $372 million in unrealized losses as a result of its derivative and non-derivative fixed income activities. The Company announced in connection with the release of its quarterly financial results that:
Although volumes were strong during most of the quarter, mortgage markets became more cWallenging later in the quarter as investor concern over the rising delinquency levels in the subprime mortgage market escalated.
During February 2007, the ABX subprime mortgage credit indices widened dramatically, reflecting investor concern due to increased delinquencies in subprime mortgages.
(Source: Bear Stears Co., SEC Form 10-Q, Feb. 28, 2007 “Management Discussion & Analysis ”).
By July 2007, the extent of BSC’s exposure to the subprime crisis began to further emerge. As of May 31, 2007, the Company’s unrealized losses as a result of its derivative and non-derivative fixed income activities increased to approximately $597 million. The Company’s stock which has been as high as $187 per share decreased to a low of approximately $134 per share losing more than 28% of its value. On July 10, 2007, the Company announced that:
Challenging market conditions in the U.S. residential mortgage business were experienced in the 2007 quarter as difficulties in the sub-prime mortgage market continued to be a concern.
(Source: Bear Stears Co., SEC Form 10-Q, July 10, 2007).
As of August 31, 2007, according to the Company’s press releases and SEC filings, the Company had total ABS/CDO related exposures of approximately $2 billion. In August 2006, the price of the Company’s common stock decreased to less than $100 per share.
On November 14, 2007, the Company announced via SEC Form 8-K that as a result of its subprime exposure, “the Company will be taking a net write-down of approximately $1.2 billion on these positions and others in our mortgage inventory.”
On December 20, 2007, the Company reported approximately $1.543 billion in unrealized losses as a result of its derivative and non-derivative fixed income activities, and on January 28, 2008, the Company reported that its “Mortgage-related revenues reflect approximately $2.3 billion in net inventory write downs in the second half of fiscal 2007.”
In January 2008, the Company’s common stock, which had been as high as $187 a year earlier, lost more than 60% its value, and decreased to a low of approximately $68 per share. On January 28, 2008, the Company also reported that:
The current global credit crisis, inventory exposure, and potential counter party credit exposure, may continue to adversely affect our business and financial results.
During 2007, higher interest rates, falling property prices and a significant increase in the number of subprime mortgages originated in 2005 and 2006 contributed to dramatic increases in mortgage delinquencies and defaults in 2007 and anticipated future delinquencies among high-risk, or subprime, borrowers in the United States.
The widespread dispersion of credit risk related to mortgage delinquencies and defaults through the securitization of mortgage-backed securities, sales of collateralized debt obligations ("CDOs") and the creation of structured investment vehicles ("SIVs") and the unclear impact on large banks of mortgage-backed securities, CDOs and SIVs caused banks to reduce their loans to each other or make them at higher interest rates.
It is difficult to predict how long these conditions will continue, whether they will continue to deteriorate and which of our markets, products and businesses will continue to be adversely affected. As a result, these conditions could adversely affect our financial condition and results of operations. In addition, we may be subject to increased regulatory scrutiny and litigation due to these issues and events.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
(Source: Bear Stears Co., SEC Form 10-Q, Jan. 28, 2008).
On March 11, 2008, or less than two weeks later, Deutsche Bank AG reported that Bear Stearns will probably have $1.9 billion more write downs in the first half of 2008. Subsequently, Oppenheimer & Co. analyst Meredith Whitney wrote that “this investment simply is mired in too much risk,” and that BSC shares “could become worthless'' if the company is forced to sell assets.”
On March 14, 2008, the Company announced that its financial condition had “significantly deteriorated,” and that absent additional capital the Company would be required to withdraw from its securities related activities.
Following this announcement and the merger of BSC with JP Morgan, on March 17, 2008, the price of BSC common stock opened at $3.17 per share.