Bear Stearns Companies, Inc. - Company Profile, Information, Business Description, History, Background Information on Bear Stearns Companies, Inc.

245 Park Avenue
New York, New York 10167

Company Perspectives:

Undoubtedly our greatest strengths are our people and our unique entrepreneurial corporate culture. What sets Bear Stearns apart from the competition is access and teamwork. Clients can access the wealth of experience and depth of knowledge of our senior people while working closely with them to create custom solutions. Our executives have a hands-on approach to running the company, guaranteeing that our most senior people work personally with clients. Our clients enjoy the enduring continuity of personal relationships and the benefits of shared experience over time.

History of Bear Stearns Companies, Inc.

Bear Stearns Companies, Inc., the holding company that owns Bear, Stearns & Company, Inc., was created on October 29, 1985, as the successor to Bear Stearns & Company and Subsidiaries, a partnership organized in 1957. The partnership, in turn, was the successor to a company founded in 1923 by Joseph Bear, Robert Stearns, and Harold Mayer as an equity-trading house. Headquartered in New York, Bear Stearns today is a full service brokerage and investment banking firm focused on three core areas: capital markets, wealth management, and global clearing services. The company maintains offices in major cities all over the globe.

Nascent Decade: 1923-33

The original company was founded with $500,000 in capital in response to the thriving investment climate of the early 1920s. 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, of course, when the New York stock market crashed in 1929. 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.

Lucrative Trendsetting from the 1930s Through the 1960s:

In 1935, Congress passed the Securities & Exchange Commission's (SEC) Public Utilities Holding Company Act, which precipitated a breakup of utility holding companies. As new securities were being issued for the formerly private companies, Bear Stearns positioned itself to take advantage of the opportunity, trading aggressively at what Lewis later called "the most ridiculous prices you ever saw in your life."

Revolutions in the freight and transportation industries beginning in the 1940s offered other opportunities. As auto transportation became more efficient and civil aviation more feasible, the once booming rail industry began to decline. Bear Stearns was quick to see an opportunity, and as most of the nation's railroads went into bankruptcy, Bear Stearns became one of the biggest arbitrators of mergers and acquisitions between railroad companies.

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.

In the 1950s, Lewis was one of the originators of block trading which, by the 1960s, was the bread and butter of most of Wall Street. Bear Stearns, like other companies, profited nicely from this trading until May 1, 1975, when the SEC's Security Act amendments, which eliminated fixed brokerage commissions, went into effect.

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 margin trading, brokerage houses loan their clients' securities to short sellers, who match the fund with their own capital and use the entire amount to finance trade, paying interest on the amount loaned.

Risky Business Leads to Profit ... and Penalty: 1975-99

In 1975, when New York City was near bankruptcy, Bear Stearns proved again that it was a risk taker 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. Like his predecessor, Greenberg shunned long-range planning in favor of immediate returns. 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 pushed it into the forefront of corporate takeover activity. The firm was described as a "breeding ground" for corporate takeover attempts, and as masterful at disguising takeover maneuvers. In some instances, however, Bear Stearns's aggressiveness earned it an unsavory reputation. The firm was known to wage proxy battles against its own clients, as it did in 1982 against Global Natural Resources after deciding that Global's management had undervalued its assets and could realize greater profits. 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 (all of them settled).

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 numerous positions at Bear Stearns were eliminated. This streamlining, however, actually helped the company when the economy fired up once again and 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. By 1992, the company had successfully included capital industry, biotechnology, and machinery stocks in its ever-expanding analysis of the corporate sector.

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 (a title he would continue to hold), 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, even volatile at times, 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 became the focus of negative attention in 1997, however, when it came under investigation 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. Traditionally, courts had not held clearing firms accountable for losses incurred by the customers of their client firms, but 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. In the end, 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; perhaps as a result, shares of its stock generally traded at discounted prices for the next two years.

An Industry Maverick Stays Its Course: 2000-2002

At the beginning of the new century, with the economy weakening, Bear Stearns found itself in a precarious position. By mid-2000, amid a climate of rampant mergers and acquisitions in the securities industry, Bear Stearns's stock price was in a two-year slump; suddenly, it was one of the last independent financial services firms on Wall Street. Though the company seemed to relish its reputation as a maverick, keeping up with competitors, most of whom were merging into global mega-forces, was a challenge.

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, but analysts criticized Bear Stearns for having moved too late in establishing itself internationally. The company's investment banking revenues languished as a result of this weak international presence.

Speculation was intense that Bear Stearns would itself be bought out by a larger financial institution seeking to secure a position on the international playing field. In the preceding months this had been the case with Donaldson Lufkin and Jenrette, PaineWebber, J.P. Morgan, and Wasserstein Perella. Conveniently, takeover rumors served to drive up the value of Bear Stearns's stock, and by January 2001, the company's earnings reports were proving the company could still continue to prosper on its own. CEO James E. Cayne shrewdly walked the line on this issue, exuding confidence about his company's ability to go it alone, while allowing that he was, nonetheless, willing to consider buyout offers.

In June 2001, at the age of 74, Alan C. Greenberg made the long anticipated 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, consumer confidence was critically low, concerns about national security were critically high, and the economy appeared to be headed straight into 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 continued to operate 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 industrywide downturn in this arena. Further, through maintaining its emphasis on clearing operations, honing in on the housing boom by increasing its focus on packaging and selling mortgages, and selling bonds to investors too skittish to buy stocks, Bear Stearns was the only securities firm to report a first-quarter profit increase in 2002, demonstrating its resilience and its competitive edge once again.

Principal Subsidiaries: Bear Stearns & Company, Inc.; Custodial Trust Co.; Bear Stearns Mortgage Capital Corp.; Bear Stearns Fiduciary Services, Inc.; Bear Stearns International, Ltd.; Bear Stearns Asia Ltd.; Bear Stearns S.A.; Bear Stearns, Ltd. (Japan); Bear Stearns Securities Corp.; Correspondent Clearing; Bear Stearns Home Loans Ltd.

Principal Competitors: Goldman, Sachs & Co.; Lehman Brothers; Merrill Lynch & Co., Inc.


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