Friday, March 14, 2008 0 comments ++[ CLICK TO COMMENT ]++

Bear Stearns Collapses

Bear Stearns, one of the largest Wall Street investment banks, is on the verge of collapse and had to borrow money from the Federal Reserve today. Since Bear Stearns can't borrow directly from the Federal Reserve (it's outside of the Federal Reserve system of banks), its borrowing was done through J.P. Morgan Chase & Co. The key problem is, courtesy of WSJ MarketBeat blog, is a withdrawl of funds by customers:

Mr. Molinaro notes that both he and Mr. Schwartz said earlier in the week that liquidity issues were not a problem at the beginning of the week, but “I would would say on Thursday we experienced pretty broad cash outflows from a number of different sources,” including prime brokerage and repo, and also saw “mark-to-market calls on open derivatives contracts. It was from a lot of places and there was a lot of concern in the market, and we had a significant level of outflows.”

The main problem at Bear Stearns is one of liquidity. It looks like their customers have ceased doing business with them, and hence resulted in large withdrawl of funds. Such a scenario is lethal to investment banks who depend on the ability to do business with counterparties.

Bear Stearns, if you recall, was one of the first financial companies to show signs of being infected by the subprime virus. It has a long, storied, history but this may the end of it as a standalone company...

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