Bear Stearns was selling for $56 a share Thursday.
On Sunday night, JP Morgan was buying the company for $2 a share.
Major news networks are in a frenzy.
Analysts are analyzing.
Government officials are rushing to reassure.
But what does it all mean for regular folks with 401(k)s and a mortgage to pay?
For a translation, we talked to Russ Kashian, UW-Whitewater associate professor of economy.
Q: What is Bear Stearns?
A: “It’s an investment bank,” Kashian said. “It’s kind of a clearinghouse.”
The company holds bonds, stocks, mortgages and other investments.
“They put them on their shelves, like cans of beans; they hold them like inventory,” Kashian said.
But it’s not enough to hold them. The company takes that inventory and uses it as collateral for other loans and investments.
Q: So what happened?
A: Remember in “It’s a Wonderful Life?” A run on the bank sent investors into a panic before George Bailey calmed them down with an inspirational speech.
Bear Stearns inventory of “beans” is only worth what the market says it’s worth.
“In August, that market seized up,” Kashian said.
The housing bubble stopped bubbling. The market became uncertain.
Bear Stearns holdings dramatically decreased in value. The banks that had loaned it money on that collateral started to call in their loans.
Of course, when one bank calls in its loans, the rest follow suit.
No one wants to be left holding the bag—especially when the bag is empty.
The Federal Reserve and the U.S. government swiftly approved the all-stock buyout to complete the deal before world markets opened.
A full collapse of Bear Stearns might have completely crushed already dwindling confidence in the global financial system, which has frozen up after last year’s collapse of the subprime mortgage market.
Q: Should we panic? What about my 401(k)?
A: Don’t panic, Kashian said.
“If you were planning to retire tomorrow, I’d tell you to wait six months,” Kashian said. “Everyone makes it sound like Armageddon. But I’ve lived through this three times, and I’m 47. It happens about once every seven or eight years.”
Q: How did this happen?
A: “People have to recognize that these guys are like gamblers,” Kashian said. “In Las Vegas, it’s considered bad form to take money off the table when you’re winning. These guys just keep winning and putting all their money back in.”
It’s not too much to call it hubris.
“People need to be financially prudent,” Kashian said.
National experts agree.
“This is about credit being overextended, and how bad it is for major financial institutions and for individuals. This is why we’re probably heading into a recession,” said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners.
Material from the Associated Press was used in this story.