Page 309 - untitled

15

MARCH 2008:
THE FALL OF BEAR STEARNS

CONTENTS

“I requested some forbearance” ..........................................................................
“We were suitably skeptical”...............................................................................
“Turn into a death spiral” ..................................................................................
“Duty to protect their investors”.........................................................................
“The government would not permit a higher number”......................................
“It was heading to a black hole”..........................................................................

After its hedge funds failed in July , Bear Stearns faced more challenges in the
second half of the year. Taking out the repo lenders to the High-Grade Fund brought
nearly . billion in subprime assets onto Bear’s books, contributing to a . billion
write-down on mortgage-related assets in November. That prompted investors to
scrutinize Bear Stearns’s finances. Over the fall, Bear’s repo lenders—mostly money
market mutual funds—increasingly required Bear to post more collateral and pay
higher interest rates. Then, in just one week in March , a run by these lenders,
hedge fund customers, and derivatives counterparties led to Bear’s having to be taken
over in a government-backed rescue.
Mortgage securitization was the biggest piece of Bear Stearns’s most-profitable di-
vision, its fixed-income business, which generated  of the firm’s total revenues.
Growing fast was the Global Client Services division, which included Bear’s prime
brokerage operation. Bear Stearns was the second-biggest prime broker in the coun-
try, with a  market share in , trailing Morgan Stanley’s . This business

would figure prominently in the crisis.
In mortgage securitization, Bear followed a vertically integrated model that made
money at every step, from loan origination through securitization and sale. It both
acquired and created its own captive originators to generate mortgages that Bear

bundled, turned into securities, and sold to investors. The smallest of the five large
investment banks, it was still a top-three underwriter of private-label mortgage–

backed securities from  to . In , it underwrote  billion in collateral-
ized debt obligations of all kinds, more than double its  figure of . billion.
