John Rothe is President and Portfolio Manager of the Rothe Financial Group, based in McLean, VA. The Rothe Financial Group, LLC, is an independent money management firm focused on building and protecting the wealth of our clients through customized portfolio management solutions
For more information visit http://www.absolutefolios.com
The break down of Bear Stearns caused unnecessary panic in the financial markets. The story of Bear Stearns and their refusal to listen to the old adage of holding all your eggs in one basket should be the lesson learned here.
Bear's history itself is impressive. The firm survived both World Wars, the Great Depression and every recession and market crash since then. So why did this prestigious investment bank fail? One has to look how Bear did business.
Collateral Mortgage Obligations (CMOs) are on the front page of every financial newspaper almost every day. CMOs are bonds that are backed by people, like you and me, paying their mortgage every month.
These bonds where once thought of as a safe investment, since most people pay their mortgage bill before they pay anything else. Well, this was Bear's main business. While other wall street firms diversified their fixed income trading desks, Bear Stearns did not. And when people stopped paying their mortgages, the game was up.
Will there be other firms that face the same consequence as Bear? Probably not. Some firms with large fixed income desks may have large write downs in the 2nd and 3rd quarters of this year, but most of these firms have diversified their operating units over the years. Wealth management, equity trading and research, asset
management, and prime brokerage services round out most Wall Street firms.
With the Federal Reserve's help, JP Morgan Chase will probably end up buying Bear Stearns (assuming
their board of directors approved it). This is a good signal to US investors that the Fed will dig deep into their bag of tools to help the US economy survive the real estate bust.
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