Convertible Assets Indeed

Bear Stearns and the U.S. market were sub-primed to fail—but classic Ferraris just head overseas to the next party

by Michael Sheehan

Throughout the week of March 12–17, the demise of Bear Stearns sent a shudder through the world’s economy. If, like me, you consider The Economist fun reading, and you survived the 1974 and 1979 gas crisis and the 1980–85, 1990–95, and NASDAQ 2000 recessions, it’s been all-too-predictable. The U.S. economy went wrong again. So what, now what?

This mess started about 1998, when real estate, hammered by the 1990–95 recession, looked like a bargain. Wall Street, eager for higher returns, and with a performance-based incentive compensation system that would push the boundaries of any compliance envelope, transformed the mortgage business from a local one—centered around banks—to a global one. Global investors, flush with cash from Asia’s boom and ever-rising oil prices, demanded high returns, and Wall Street’s answer was sub-prime mortgages.

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