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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
and JP Morgan. On May , in a preliminary estimate, Cioffi told investors that the
net asset value of the Enhanced Leverage Fund was down . in April. In computing
the final numbers later that month, he requested that BSAM’s Pricing Committee in-
stead use fair value marks based on his team’s modeling, which implied losses that were
to million less than losses using Goldman’s marks. On June , although Gold-
man’s marks were considered low, the Pricing Committee decided to continue to aver-
age dealer marks rather than to use fair value. The committee also noted that the
decline in net asset value would be greater than the . estimate, because “many of the
positions that were marked down received dealer marks after release of the estimate.”
The decline was revised from . to . According to Cioffi, a number of factors
contributed to the April revision, and Goldman’s marks were one factor. After these
meetings, Cioffi emailed one committee member: “There is no market . . . its [sic] all ac-
ademic anyway— [value] is doomsday.” On June , BSAM announced the
drop and froze redemptions.
“Canary in the mine shaft”
When JP Morgan contacted Bear’s co-president Alan Schwartz in April about its up-
coming margin call, Schwartz convened an executive committee meeting to discuss
how repo lenders were marking down positions and making margin calls on the basis
of those new marks. In early June, Bear met with BSAM’s repo lenders to explain
that BSAM lacked cash to meet margin calls and to negotiate a -day reprieve. Some
of these very same firms had sold Enhanced and High-Grade some of the same
CDOs and other securities that were turning out to be such bad assets. Now all
refused Schwartz’s appeal; instead, they made margin calls. As a direct result, the
two funds had to sell collateral at distressed prices to raise cash. Selling the bonds
led to a complete loss of confidence by the investors, whose requests for redemptions
accelerated.
Shortly after BSAM froze redemptions, Merrill Lynch seized more than mil-
lion of its collateral posted by Bear for its outstanding repo loans. Merrill was able to
sell just million of the seized collateral at auction by July —and at discounts to
its face value. Other repo lenders were increasing their collateral requirements or
refusing to roll over their loans. This run on both hedge funds left both BSAM and
Bear Stearns with limited options. Although it owned the asset management busi-
ness, Bear’s equity positions in the two BSAM hedge funds were relatively small. On
April , Bear’s co-president Warren Spector approved a million investment into
the Enhanced Leverage Fund. Bear Stearns had no legal obligation to rescue either
the funds or their repo lenders. However, those lenders were the same large invest-
ment banks that Bear Stearns dealt with every day. Moreover, any failure of entities
related to Bear Stearns could raise investors’ concerns about the firm itself.
Thomas Marano, the head of the mortgage trading desk, told FCIC staff that the
constant barrage of margin calls had created chaos at Bear. In late June, Bear Stearns
dispatched him to engineer a solution with Richard Marin, BSAM’s CEO. Marano
now worked to understand the portfolio, including what it might be worth in a worst-
