The student news site of Guilford College

The Guilfordian

The student news site of Guilford College

The Guilfordian

The student news site of Guilford College

The Guilfordian

Bear Stearns’ troubles tip of the iceberg

“An ounce of prevention is worth a pound of cure,” is one of my mother’s favorite sayings. Our country’s current mortgage crisis and the economy as a whole demonstrate the wisdom of these well-known words.Earlier this month, Americans witnessed something many thought they would never see. It was something that could be a sign of things to come. Bear Stearns sold itself to J.P. Morgan for a mere $2 per share, adding up to $236 million. Just over a year ago, in Jan. 2007, Stearns was worth $20 billion, emphasis on the “B”. So what went wrong between then and now?

Millions of homeowners that received mortgage loans through Bear Stearns went belly-up. This means that for whatever reasons, they failed to make monthly mortgage payments, and the bank had to foreclose. As both my parents are local real estate agents, I know a little about what gets homeowners in trouble.

Growing up, I heard much talk about mortgage loans. As a result, I know that a fixed rate mortgage is better than an adjustable one. I also know that a lower interest rate makes for a lower payment. Finally I know, “If you don’t pay, you don’t stay.”

Bear suffered tremendous losses in the mortgage segment of its business. Making matters worse, mortgage losses triggered a lack of customer confidence in other areas of the bank’s business, such as investments. Dwindling assets soon pushed the company to a point of near collapse.

Bear Stearns had two choices: file bankruptcy, or sell the firm at any price to a larger company willing and able to take on its trading obligations. Enter J.P. Morgan, which agreed to step in because the Federal Reserve Bank assured Morgan a $30 billion line of credit. The move is quite possibly the largest federal advance to any one bank in history.

To the distaste of some, the federal government has come to the rescue of Wall Street heading off a financial disaster. But who is coming to the rescue of the other group of casualties of Wall Street’s near disaster? Bear stockholders and employees are most definitely losers in this mess, but for the other group of losers, disaster struck with no mercy. This group is the thousands of people who lost, or will lose, their homes through foreclosure.

This is a case wherein the best rescue would have been that “ounce of prevention” mentioned earlier. The largest number of foreclosures have happened on homes financed with subprime mortgages. Subprime loans (now becoming extinct), were characterized by higher interest rates, adjustable terms, and pre-payment penalties.

They were often made to unwitting consumers who simply wanted a piece of the American dream. Studies show that these loans were more frequently made to African- Americans and Hispanics. Bear held its share of such mortgages, and it is no wonder they did not pay off in the long run.

The current housing crisis is another example of government’s failure to use its regulatory authority in a timely manner. The Federal Reserve was aware of the unconventional practices in mortgage lending used by Bear Stearns and other lending institutions. It should have used its powers and money early on to end the practices. The price tag would have been far less than $30 billion.

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