Word: bearings
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Dates: during 2000-2009
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...question, one of the most dramatic episodes in American financial history. A famously scrappy Wall Street investment bank, Bear Stearns, went from seemingly healthy to dead meat in about five days. Federal Reserve Chairman Ben Bernanke, desperate to avoid a sudden collapse that might cause a full-fledged market panic, invoked a little-known 1930s legal provision to engineer a Sunday fire sale of Bear Stearns to banking giant JPMorgan Chase for a mere $2 a share. (Bear's stock price was $57 a week before, $171.51 in early...
...With Bear shareholders virtually wiped out, half the firm's employees slated to lose their jobs and no golden parachutes offered to the top executives, it wasn't a bailout. But it did take a $30 billion loan from the Fed to seal the deal. This was a truly extraordinary use of the central bank's powers and an indication that the subprime-mortgage crisis that erupted last summer has evolved into something bigger and more ominous--possibly the greatest challenge to the American way of financial capitalism since the Depression...
...deal--and to the three-quarter-point interest-rate cut announced by the Fed two days later--was positive. Stocks rose nearly 4%; credit markets calmed a bit; the global financial system lived to fret another day. And fret it surely will, for the troubles that mauled Bear are far from over...
Nevertheless, all those mortgages that started the problem are still worth something. House prices are headed downward, but they're not headed to zero. What turned a simple price decline into a crisis that killed Bear Stearns was the way many financial firms (hedge funds and investment banks, especially) generate their profits: by making bets with borrowed money. To borrow that money, they have to put up collateral--for example, mortgage securities. Lately, many firms have been simultaneously beset by bets gone bad and skittish lenders' calling in loans or demanding more collateral...
Several big hedge funds had already been driven out of business by such lender squeezes, starting last summer with two mortgage funds run by Bear Stearns. But Bear itself still turned a small profit in 2007. As late as the first week of March this year, there was no reason to think it was in imminent danger. Then rumors began flying that it was. Lenders refused to lend, clients refused to trade, and suddenly Bear was out of money. It was a bank run, more or less. And the scary thing was that there is no entirely satisfactory explanation...