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Bear Stearns: What Went Wrong

What's up with Bear Stearns? Dick Bove at Punk Ziegel has just put out a note to his clients, and while he did not address the specific rumors floating around, he did tell me that the main problem is that "the business model is broken."

According to Bove:

1) Bear Stearns was vertically integrated in the mortgage business -- they did origination, securitization, structured products, and sale of products to funds they operate.

2) They made their big money on structured products, and sales of those products. When the volume fell apart for those products, they no longer made big money.

3) This harmed their balance sheet because they didn't get out soon enough, driving up the cost of funding. That is hurting their prime brokerage business, because that is based on low cost of funding.

4) It's difficult to be a full-line investment bank if you can't offer big customers loans because the balance sheet won't support it.

5) ...then you have to fire people, losing opportunities.

6) Bove told me the most likely outcome here was a sale of the company.



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