Economic Update

The engineered takeover of Bear Stearns

The subprime mortgage meltdown made 2007 a disastrous year for Bear Stearns, one of the nation’s largest underwriters of mortgage bonds. Beginning this summer with the housing slowdown, Bear Stearns has stood as the prime example of how Wall Street’s big bet on securities based on risky home loans went south.

While many of its peers, including Merrill, Morgan Stanley and Citigroup, have announced far more in devaluations, Bear Stearns draws far more of its profit from its trading operations. That was reflected in its fixed income unit, which reported a net loss of $1.5 billion, down sharply from the $1.1 billion in profit the bank reported for the same time last year.

While there were rumblings about the weakness of the subprime mortgage in the spring of 2007, it was the collapse in June of two internal Bear Stearns hedge funds that had been heavily invested in mortgage securities that kicked off the full-fledged market panic that peaked in August.

Trends researcher Gerald Celente reacted to the engineered takeover of Bear Stearns Cos., calling it the "St. Patrick's Day Massacre." The Federal Reserve is sacrificing the value of the dollar to "bail out their friends," he said, and this is just the start of the "economic 9-11" he's predicted for 2008. We're going to go through an inflationary cycle like never before, Celente cautioned.