To: Clients of Hammond Associates
From: Anthony Brown, Chief Investment Officer
Date: March 19, 2008
Re: Bear Stearns and the Global Problem
The crisis at Bear Stearns has heightened concerns on the hidden, systemic risks imbedded throughout
the global financial system today. But Bear’s problems probably are not the last of the woes for global
financial markets, as the strain of over-leverage and inter-relatedness wears on banking institutions in this
global liquidity contraction.
With over $30 of levered assets per dollar of capital (not unlike other investment banks), Bear’s losses on
subprime bonds and other risky securities quickly eroded its capital. The firm’s death was hastened by a
classic bank run—hedge funds and other players moved assets away from the firm as its solvency came
into question. With the help of the Fed, JP Morgan stepped in to purchase Bear for $2 per share, 93%
below Friday’s close and 99% below the 52-week high of $160. Bear Stearns is currently trading at $6,
suggesting the story may not be over yet.
The S&P 500 declined 2% on Friday when it was revealed that Bear Stearns was close to failing. In an
unprecedented move, the Fed cut the discount rate on Sunday (!) to front-run Asian markets and the
opening bell on Monday. Nevertheless, Asian markets plummeted Sunday night on the news of the sale.
Monday saw the S&P 500 fall as much as 2.5% (briefly putting it in bear market territory), before trimming
losses to just 0.9% by the close. As the day wore on investors finally took comfort in the Fed’s weekend
efforts, on the heels of last week’s promise to trade $200B in Treasuries for