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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

“DUTY TO PROTECT THEIR INVESTORS”
On Wednesday, January , , Treasurer Upton reported an internal accounting
error that showed Bear Stearns to have less than  billion in liquidity—triggering a
report to the SEC. While the company identified the error, the SEC reinstituted daily
reporting by the company of its liquidity. 
Lenders and customers were more and more reluctant to do business with the
company. On February , Bear Stearns had . billion in mortgages, mortgage-
backed securities, and asset-backed securities on its balance sheet, down almost 
billion from November. Nearly  billion were subprime or Alt-A mortgage–backed
securities and CDOs.
The hedge funds that were clients of Bear’s prime brokerage services were particu-
larly concerned that Bear would be unable to return their cash and securities. Lou
Lebedin, the head of Bear’s prime brokerage, told the FCIC that hedge fund clients
occasionally inquired about the bank’s financial condition in the latter half of ,
but that such inquiries picked up at the beginning of , particularly as the cost in-
creased of purchasing credit default swap protection on Bear. The inquiries became
withdrawals—hedge funds started taking their business elsewhere. “They felt there
were too many concerns about us and felt that this was a short-term move,” Lebedin
said. “Often they would tell us they’d be happy to bring the business back, but that
they had the duty to protect their investors.” Renaissance Technologies, one of Bear’s
biggest prime brokerage clients, pulled out all of its business. By April, Lebedin’s
prime brokerage operation would be holding  billion in assets under manage-
ment, down more than  from  billion in January. 
Nonetheless, during the week of March , when SEC staff inspected Bear’s liquid-
ity pool, they identified “no significant issues.” The SEC found Bear’s liquidity pool
ranged from  billion to  billion. 
Bear opened for business on Monday, March , with approximately  billion
in cash reserves. The same day, Moody’s downgraded  mortgage-backed securities
issued by Bear Stearns Alt-A Trust, a special purpose entity. News reports on the
downgrades carried abbreviated headlines stating, “Moody’s Downgrades Bear
Stearns,” Upton said. Rumors flew and counterparties panicked. Bear’s liquidity


pool began to dry up, and the SEC was now concerned that Bear was being squeezed

from all directions. While “everything rolled” during the day—that is, Bear’s repo
lenders renewed their commitments—SEC officials worried that this would “proba-
bly not continue.” 
On Tuesday, the Fed announced it would lend to investment banks and other
“primary dealers.” The Term Securities Lending Facility (TSLF) would make avail-
able up to  billion in Treasury securities, accepting as collateral GSE mortgage–
backed securities and non-GSE mortgage–backed securities rated triple-A. The hope
was that lenders would lend to investment banks if the collateral was Treasuries
rather than other highly rated but now suspect assets such as mortgage-backed secu-
rities. The Fed also announced it would extend loans from overnight to  days, giv-