Subprime Mortgage Crisis - Essay Example

Subprime Mortgage Crisis The Bear Stearns Introduction The Bear Stearns Companies, Inc. was a global investment financial institution that also dealt in securities trading and brokerage in the New York which failed in its duties to its clients and failed in 2008 as a result of the global financial crisis and economic recession leading to its subsequent selling to JPMorgan Chase. This paper seeks to discuss what Bear Stearns did wrong and the outcome of the accusations. It explains who they were, what they did as well as focus on fraud around the Sub Prime mortgage crisis. Bear Stearns failed largely because it had spent the previous five years gorging on subprime mortgages in what appeared to be an ever-rising housing market. When home prices started falling and those loans started to go bad, Bear’s creditors got scared and pulled their money out of the investment bank. Body The U.S. subprime mortgage crisis was an unfolding of events and that were significant aspects of a financial recession and subsequent crisis that was manifested significantly in 2008. It was characterized by an upsurge in subprime mortgage and foreclosures, and the resultant drop of securities was backed up by the mortgages. These mortgage-backed securities (MBS) and collateralized debt obligations (CDO) usually offered attractive return rates due to the high rates of interest on the mortgages but the lower quality of credit ultimately caused huge defaults. In as much as the crisis elements became more clear in 2007, most major financial institutions collapsed in September of 2008, with distinguishable disruption in the credit flow to businesses and consumers during the onset of the most severe worldwide recession. This subprime mortgage crisis was accompanied by fraud issues concerning relating to the Bear Stearns Company. Bear Stearns, had been on Wall Street feature from 1923 and had survived the 1929 crash without lying off any employees. But in 2008, its customers and creditors were worried that the billions of dollars of mortgage-backed securities on its books weren’t worth what the company claimed. Therefore, they stopped doing business with Bear Stearns.Within a few days; Bear was digested into JPMorgan Chase & Co. via the help of the Federal Reserve for an approximate value of a new Madison Avenue office tower. Bear Stearns failure was attributed largely to gorging on subprime mortgages in the previous years in what was termed as a continually-rising housing market. When home prices dropped and those loans worsened, Bear’s creditors pulled out their money from the investment bank. Years later, the executives in charge of Bear’s headlong dived into the cesspool of subprime mortgage lending and still holding similar jobs at some of the most powerful financial institutions in Wall Street such as JPMorgan, Goldman Sachs, Bank of America and Deutsche Bank. The fact that they were able to come out undeterred from a financial crisis that wiped out approximately $19.2 trillion worth of household wealth in the US and as much as 8.8 million occupations is regarded as part of the legacy of the financial drop. “It’s clear that the ones at the top got the most in terms of compensation and suffered few consequences from these decisions,” Four executives, Thomas Marano, Jeffrey Verschleiser, Michael Nierenberg and Jeffrey Mayer, were accused of making untruthful statements in disclosures to federal regulators in a lawsuit filed by the Federal Housing Finance Agency, which oversaw state-owned mortgage giants Fannie Mae and Freddie Mac.  They lie among a number of people and companies mentioned in the lawsuit. In a 179-page response to the lawsuit, all of them denied the allegations. According to Thomas J. DiLorenzo in the Government-Created Subprime Mortgage Meltdown. AMBAC Assurance Corp that guaranteed some of Bear’s mortgage bonds and went bankrupt in 2010, accused Bear of fraud in a separate lawsuit that described actions by the six mortgage division leaders. AMBAC emerged from bankruptcy in May. Yet all six continue to work at the top levels of their field, earning salaries and bonuses that have allowed them to live in luxury while the mortgages that made up the bonds they sold have defaulted at alarming rates. Thomas Marano, who led Bear’s mortgage finance division, is the most telling example. His division oversaw the mortgage operation from beginning to end. As world head of mortgages, asset-backed securities and commercial mortgage-backed securities at Bear Stearns, he supervised the underwriting and securitization of subprime loans from Bear’s mortgage subsidiary EMC Mortgage Corp.When Bear went under, “everybody and their brother descended on the place,” looking to hire the best talent, “ (Chad Dean). Marano was brought to clean up the mess. It was a difficult task. There was absolutely something wrong with executive compensation that gave extraordinary rewards to executives while at the same time shareholders’ value was destroyed. Verschleiser, who reported directly to Marano as head of asset-backed securities,   was hired at Goldman Sachs in 2008 and then promoted to global head of mortgage trading. According to documents filed in the AMBAC lawsuit, Verschleiser encouraged Bear to short the stock of mortgage bond guarantors because he knew they would likely incur losses because of bad loans included in the mortgage pools when the betting prices fell. Michael Nierenberg and Baron Silverstein Nierenberg led the changeable rate mortgage and collateralized debt obligations at Bear Stearns, which underwrote $36 billion of CDOs in 2006.He’s now heads mortgages and securitized products at Bank of America. Silverstein, once a senior managing director at Bear and co-head of mortgage finance,  stayed at JPMorgan for a time after the acquisition and later moved to Bank of America as managing director in charge of the mortgage finance department. Mary Haggerty Mary Haggerty was a co-head of mortgage finance at Bear and was retained by JPMorgan as a managing director in the securitized products group. Mary Haggerty bought a $950,000 apartment in New York City in 2005, according to the city’s property records. Jeffrey Mayer Jeffrey Mayer was co-head of fixed income at Bear Stearns and Marano’s supervisor. After Bear’s demise he was scooped up by Swiss banking giant UBS in 2008 and awarded a nearly identical position. Two years later he jumped to Deutsche Bank, as head of corporate banking and securities in North America. Currently very few meaningful prosecutions and against the concerned individuals who were in power positions during the time of the financial crisis. The Justice Department failed to successfully prosecute two Bear Stearns executives of the hedge fund for fraud, saying that they cheated the investors about the situation of the health of the funds. Both of them were however were acquitted in 2009, and since then no one has criminally been charged among any of the top-level Wall Street executives. Neither of the brokers has had their licenses revoked as the Financial Industry Regulatory Authority has noted the lawsuits on their records. Works Cited http://www.globalresearch.ca/mortgage-fraud-former-bear-stearns-mortgage-executives-have-plum-jobs-on-wall-street/5345126  Lewis, Michael (2010). The Big Short: Inside the Doomsday Machine. WW Norton and Co. pp. 99–100.  Schwartz, Nelson D.; Dash, Eric (2010-05-13). "With Banks Under Fire, Some Expect a Settlement". The New York Times. Retrieved 2013-04-20.Print. Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Bank, Credit and Merrill Lynch, Thomas J. DiLorenzo, The Government-Created Subprime Mortgage Meltdown,LewRockwell.com, September 6, 2007 access date=2007-12-07 Read More