Can somebody who understands high finance explain to me how the fuck an outfit like Bear Stearns could fall apart so fast?
Two months ago they were selling shares for something like $170. They got gobbled up yesterday for $2/share.
What does this mean to a common man like me?
Bear Stearns got caught up in the sub-prime lending mess. Mortgate-related losses meant that (i) its assets weren't as much as it believed, (ii) the decline in asset value affected its liquidity so it couldn't pay bills as they came due and (iii) in such a state, nobody wanted to do business with it.
When a company's assets are worth less than its liabilities and if it can't pay its bills, the company is insolvent and its equity is essentially worthless. Voila - $2 per share. The market can only digest information that is available and as more and more information became available in regard to the nature of its assets and its potential liquidity problems, the stock price responded by going lower and lower. The $2 was just a tip to make the transaction go more smoothly (just so JP can say it paid something). They essentially got Bear for Bear's assumed liabilities.
What does it mean for you SC?
1 - It is one of the headline stories of the economic times that we're in. Housing is down, we're probably headed for a recession... On the upside, the economy will get better once we go through a rough patch.
2 - Diversify, diversify, diversify. When you invest, stick to index funds. Don't overload on one company, one sector... I feel bad for all those employees who lost their life savings, because they were overloaded on Bear stock.
