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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

During every business day, these clearing banks return cash to lenders; take posses-
sion of borrowers’ collateral, essentially keeping it in escrow; and then lend their own
cash to borrowers during the day. This is referred to as “unwinding” the repo transac-
tion; it allows borrowers to change the assets posted as collateral every day. The
transaction is then “rewound” at the end of the day, when the lenders post cash to the
clearing banks in return for the new collateral.
The little-regulated tri-party repo market had grown from  billion in average
daily volume in  to . trillion in , . trillion in , and . trillion by

early . It had become a very deep and liquid market. Even though most bor-
rowers rolled repo overnight, it was also considered a very safe market, because
transactions were overcollateralized (loans were made for less than the collateral was
worth). That was the general view before the onset of the financial crisis.
As Bear increased its tri-party repo borrowing, it became more dependent on JP
Morgan, the clearing bank. A risk that was little appreciated before  was that
JP Morgan and BNY Mellon could face large losses if a counterparty such as Bear de-
faulted during the day. Essentially, JP Morgan served as Bear’s daytime repo lender.
Even long-term repo loans have to be unwound every day by the clearing bank, if
not by the lender. Seth Carpenter, an officer at the Federal Reserve Board, compared
it to a mortgage that has to be refinanced every week: “Imagine that your mortgage is
only a week. Instead of a -year mortgage, you’ve got a one-week mortgage. If every-
thing’s going fine, you get to the end of the week, you go out and you refinance that
mortgage because you don’t have enough cash on hand to pay off the whole mort-
gage. And then you get to the end of another week and you refinance that mortgage.
And that’s, for all intents and purposes, what repos are like for many institutions.” 
During the fall, Federated Investors, which had taken Bear Stearns off its list of
approved commercial paper counterparties, continued to provide secured repo

loans. Fidelity Investments, another major lender, limited its overall exposure to
Bear, and shortened the maturities. In October, State Street Global Advisors refused

any repo lending to Bear other than overnight. 
Often, backing Bear’s borrowing were mortgage-related securities and of these,
. billion—more than Bear’s equity—were Level  assets.
In the fourth quarter of , Bear Stearns reported its first quarterly loss, 
million. Still, the SEC saw “no evidence of any deterioration in the firm’s liquidity po-
sition following the release and related negative press coverage.” The SEC concluded,
“Bear Stearns’ liquidity pool remains stable.” 
In the fall of , Bear’s board had commissioned the consultant Oliver Wyman
to review the firm’s risk management. The report, “Risk Governance Diagnostic: Rec-
ommendations and Case for Economic Capital Development,” was presented on Feb-
ruary , , to the management committee. Among its conclusions: risk
assessment was “infrequent and ad hoc” and “hampered by insufficient and poorly
aligned resources,” “risk managers [were] not effectively positioned to challenge front
office decisions,” and risk management was “understaffed” and considered a “low pri-
ority.” Schwartz told the FCIC the findings did not indicate substantial deficiencies.
He wasn’t looking for positive feedback from the consultants, because the Wyman re-