Bear Stearns bet the bank on subprime mortgages — and was sold for pennies in a fire sale

Bear Stearns was one of the largest investment banks in the United States. In the years before 2008, it had bet heavily on the US housing market, packaging and holding large amounts of subprime mortgage-backed securities — bets that looked profitable while house prices rose. As early as 2007, two of its hedge funds heavily exposed to subprime mortgages collapsed, an early warning of what was coming.

In March 2008, the bank faced a classic run: as confidence evaporated, the lenders and counterparties that funded its daily operations pulled back, and Bear Stearns ran out of cash. An investment bank that relies on short-term funding cannot survive a loss of confidence. Over a single weekend, with the Federal Reserve brokering the deal and guaranteeing $30 billion of assets, Bear Stearns was sold to JPMorgan Chase.

The price was humiliating: $2 a share (later raised to $10), for a firm whose stock had traded above $170 just a year earlier. The fire sale of Bear Stearns was the first major domino of the 2008 financial crisis, a signal that even a top Wall Street bank could fail almost overnight when its funding vanished and its bets on housing turned to losses.