From our first 3 videos in this series we should now have a good understanding of the basics of what lead to the fall of Bear Stearns, know a little bit more about the business of the firm, and have seen both sides of the argument on whether or not the Government and/or the Federal Reserve should have gotten involved. Next let’s take a look at the time leading up to the firm’s near bankruptcy so we can get an idea of why the Government and The Fed stepped in when it did and whether or not we feel that this was the right move.

On Monday March the 10th rumors started to circulate that Bear may not have enough cash on hand to meet their obligations. It is not clear where these rumors started (some say they were started by hedge funds that were shorting the stock) but whatever the case the rumors were not what the already shaky market needed. To try and quell any fears about the firm’s ability to meet its obligations Bear issued a press release saying "There is absolutely no truth to the rumors of liquidity problems that circulated today in the market''.

The next day the Federal Reserve introduced a program where they would basically lend directly to investment banks starting on March 27th. We are not going to go into all the details of this here but what is important to know is that the Fed normally only acts as a lender of last resort to commercial banks only, and this is the first time they have agreed to also lend to Investment Banks since the Great Depression. As the Fed was now there for Investment banks who may run into short term problems, many thought that this would calm the market and the rumors surrounding Bear Stearns.

Unfortunately for Bear Stearns however the rumors only intensified to the point where on Wednesday March 12th Alan Schwartz, the company’s CEO, went on CNBC to reiterate that the firm’s liquidity position had not changed.

While the stock market took this statement well, initially pushing the stock up $3 a share, behind the scenes Bear’s clients and lenders were taking money out of the firm as quickly as possible to avoid being stuck in a potential bankruptcy and losing their money. As a result of this by the close of business Thursday, as reported in the Wall Street Journal, the firm’s cash position had shrunk from $17 billion to just $2 billion. This put the company in a position where they no longer had enough cash on hand to meet their obligations and were going to have to file bankruptcy Friday morning.

As also reported in the Wall Street Journal, that same morning they were scheduled to start paying back some of the billions of dollars in repo loans, the overnight loans that banks rely on heavily to run their businesses. This is a 4.5 Trillion dollar market and a default by a bank as large as Bear Stearns would have had huge repercussions throughout the market another situation which could potentially bring down the whole financial system.
This is where the US Government, The Federal Reserve, and JP Morgan enter the picture, a fascinating turn of events which we will most likely be reading about for years to come and the topic of our next video.

For more great learning resources and up to date news on the subprime financial crisis visit our subprime crisis learning center at InformedTrades.com, and have a great day!