History of Bear Stearns

An equity trading house was founded in 1923 by Joseph Bear, Robert Stearns, and Harold Mayer. It was started with $500,000 in capital. World War I, with its heavy demand for capital, had encouraged the public to enter the securities markets in mass, and the young Bear Stearns prospered in the frenzied optimism of those markets. The company began trading in government securities and soon became a leading trader in this area.

Trading fell off sharply in the 1929 crash. Though Bear Stearns suffered setbacks, it had accumulated enough capital to survive quite well: during this crisis it not only avoided any employee layoffs but continued to pay bonuses. As the country struggled out of the Depression, Bear Stearns entered into the bond market to promote President Franklin Roosevelt's call for renewed development of the nation's infrastructure through the New Deal.

During the period following Roosevelt's reform measures, the nation's banking system had accumulated a large amount of cash, since demand for loans was very low. At the same time, bonds were very cheap. Bear Stearns made its first substantial profits by selling large volumes of these bonds to cash-rich banks around the country.

By 1933 the firm had grown from its original seven employees to 75, had opened its first regional office in Chicago (after buying out the Chicago-based firm of Stein, Brennan), and had accumulated a capital base of $800,000. That year Salim L. "Cy" Lewis, a former runner for Salomon Brothers, was hired to direct Bear Stearns's new institutional bond trading department. Lewis, who became a partner in 1938, a managing partner in the 1950s, and then chairman, built Bear Stearns into a large, influential firm. An almost legendary character, Lewis's outspokenness and drive were what gave Bear Stearns the style that made it stand out on Wall Street for decades to come.

In 1948 Bear Stearns opened an international department, although it was not until 1955 that the firm opened its first international office, in Amsterdam. As its international business prospered, the company opened other foreign offices, in Geneva, Paris, London, Hong Kong, and Tokyo.

Bear Stearns began expanding its retail business operations in the late 1960s, once again ahead of the trend. It opened an office in San Francisco in 1965, and between 1969 and 1973 opened offices in Los Angeles, Dallas, Atlanta, and Boston. The company was very successful at attracting and managing accounts for wealthy individuals. These accounts also laid the foundation for the company's successful margin operations.

In 1975, when New York City was near bankruptcy, Bear Stearns took the risk by investing $10 million in the city's securities. Though it came close to losing millions of dollars, the firm eventually profited greatly from the gamble.

In May 1978, Alan "Ace" Greenberg became chairman of Bear Stearns, following the death of Cy Lewis. Greenberg had joined the firm as a clerk in 1949. He moved up rapidly within the company; by 1953, at age 25, he was running the risk arbitrage desk and by 1957 he was trading for the firm. By the time he became chairman, Greenberg had earned a reputation as one of the most aggressive traders on Wall Street. It soon became apparent that Greenberg's abilities equaled and perhaps surpassed those of his predecessor. From the time he took over as chairman until Bear Stearns went public in 1985, the firm's total capital went from $46 million to $517 million; in 1989, it was $1.4 billion.

Bear Stearns's willingness to take risks allowed it to venture into corporate takeover activity. The firm was described as a "breeding ground" for corporate takeover attempts. In 1986, Bear Stearns developed an option agreement that essentially allowed clients to buy stock under Bear Stearns's name, a tactic that facilitated corporate takeover attempts. The Justice Department and the SEC put an end to such tactics by filing suits against several of Bear Stearns's clients for "parking" stock.

In October 1985, Greenberg and the firm's executive committee announced that Bear Stearns would make a public stock offering in an effort to increase the company's ability to raise capital to finance larger trades. Part of the strategy included the formation of a holding company named Bear Stearns Companies, Inc. Shortly after the initial 20 percent offering, Bear Stearns reorganized from a brokerage house into a full-service investment firm with divisions in investment banking, institutional equities, fixed income securities, individual investor services, and mortgage-related products.

The company was hit hard by the 1987 Wall Street crash and eliminated number of jobs. When the economy fired up once again, revenues from its investment banking division and its brokerage commissions began to increase substantially. By 1991, Bear Stearns had become the top equity underwriter in Latin America.

In 1992, Bear Stearns saw earnings double to over $295 million. During the same year, the company managed more than $13 billion in initial public offerings (IPOs) for a variety of U.S. and foreign corporations. The company also had become a leader in clearing trades for other brokers and brokerages, and boasted one of the best ratios in the industry of analysts to brokers.

In 1993, James E. Cayne succeeded Alan Greenberg as CEO. As president, Cayne had helped to guide the company toward new opportunities for profit in investment banking and foreign markets. By contrast to Greenberg, whose executive style was known to be impulsive, Cayne had found success with a more cautious approach: he was known to avoid taking big risks and often to call upon consultants to enlighten his decision-making process. Together, Cayne and Greenberg were thought to make a powerful and well-balanced team. At the time of Cayne's succession to CEO, Greenberg still retained the title of chairman as well as the final word at Bear Stearns.

In the mid-1990s, Bear Stearns continued its concerted drive to establish itself in emerging foreign markets in Asia and Latin America. Toward this end the company opened a representative office in Beijing in 1994--a diplomatic as well as pragmatic move, as the addition of the Beijing office to Bear Stearns's Hong Kong headquarters was touted as an important demonstration of respect for and commitment to China as a formidable world financial power. Bear Stearns Asia Ltd. was significantly rewarded for this commitment in 1995, when it was chosen by Guangzhou Railway Corporation to be the sole lead underwriter for its public offering, a prime assignment in the eyes of Bear Stearns's competitors in Hong Kong.

Bear Stearns came under investigation in 1997 by the SEC for its role as a clearing broker for a smaller brokerage named A.R. Baron, which had gone bankrupt in 1996 and defrauded its customers of $75 million. In this case Bear Stearns was accused of overstepping its bounds as a clearinghouse by continuing to process trades, loan money, and extend credit to Baron in the face of mounting evidence that the firm, then in serious financial jeopardy, was manipulating stock prices and conducting unauthorized trading while raiding the accounts of its customers.

By the summer of 1999, after a two-year probe, Bear Stearns settled civil and criminal charges with the SEC and the Manhattan District Attorney, respectively, agreeing to pay a total of $42 million in fines and restitution. Bear Stearns refused to accept or deny guilt in the settlements, and made public assurances that the settlements were immaterial to the business and financial well-being of the company. Nevertheless, the scandal tainted the records of Greenberg and Cayne and adversely affected the image of the company. Shares of its stock generally traded at discounted prices for the next two years.

Bear Stearns moved aggressively to expand its London office, adding 100 new employees to the existing 600 in early 2000, and moved to grow its European presence.


In June 2001, at the age of 74, Alan C. Greenberg made announcement that he would step down as Bear Stearns's chairman, handing over his title and the reigns of the company to CEO James E. Cayne.

After the terrorist attacks of September 11, 2001, securities markets had problems due to dotcom bubble burst and a recession. Bear Stearns--typically the last in the securities industry to cut jobs--succumbed to the need to reduce expenses by laying off 800 bankers, about 7 percent of its workforce. Ironically, some of the cutbacks included jobs in the London office, the office the company had worked so vigorously to expand a year earlier.

Bear Stearns operated on a different model than the rest of Wall Street, and this worked to the company's advantage in the early 2000s. The company had not been as competitive as some in advising on mergers and acquisitions in the late1990s, and as a result, it was one of the few firms to avoid significant losses from the industry-wide downturn in this arena. It maintained its emphasis on clearing operations. It took a special interest in the housing boom and increased its focus on packaging and selling mortgages, and selling bonds to investors. This strategy worked and Bear Stearns was the only securities firm to report a first-quarter profit increase in 2002, demonstrating its resilience and its competitive edge.

James “Jimmy” Cayne gave up control of the fifth-largest U.S. investment bank amid unprecedented losses from the subprime mortgage crisis in January 2008. He was succeeded by President Alan Schwartz as CEO. Cayne, became a non-executive chairman.



Sources:

http://www.msnbc.msn.com/id/22546996/