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MARCH : THE FALL OF BEAR STEARNS 

ing investment banks an added breather from the relentless need to unwind repos
every morning.
With the TSLF, the Fed would be setting a new precedent by extending emergency
credit to institutions other than commercial banks. To do so, the Federal Reserve
Board was required under section () of the Federal Reserve Act to determine that
there were “unusual and exigent circumstances.” The Fed had not invoked its section
() authority since the Great Depression; it was the Fed’s first use of the authority
since Congress had expanded the language of the act in  to allow the Fed to lend

to investment banks. The Fed was taking the unusual step of declaring its willing-
ness to soon open its checkbook to institutions it did not regulate and whose finan-
cial condition it had never examined.
But the Fed would not launch the TSLF until March , more than two weeks
later—and it was not clear that Bear could last that long. The following day, Jim Em-
bersit of the Federal Reserve Board checked on Bear’s liquidity with the SEC. The
SEC said Bear had . billion in cash—down from about  billion at the start of
the week—and was able to finance all its bank loans and most of its equity securities
through the repo market. He summarized, “The SEC indicates that no notable losses
have been sustained and that the capital position of the firm is ‘fine.’” 
Derivatives counterparties were increasingly reluctant to be exposed to Bear. In
some cases they unwound trades in which they faced Bear, and in others they made

margin or collateral calls. In Bear’s last few years as an independent company, it had
substantially increased its exposure to derivatives. At the end of fiscal year , Bear
had . trillion in notional exposure on derivatives contracts, compared with .
trillion at  fiscal year-end and . trillion at the end of .
Derivatives counterparties who worried about Bear’s ability to make good on
their payments could get out of their derivative positions with Bear through assign-
ments or novations. Assignments allow counterparties to assign their positions to
someone else: if firm X has a derivatives contract with firm Y, then firm X can assign
its position to firm Z, so that Z now is the one that has a derivatives contract with Y.
Novations also allow counterparties to get out of their exposure to each other, but by
bringing in a third party: instead of X facing Y, X faces Z and Z faces Y. Both assign-
ments and novations are routine transactions on Wall Street. But on Tuesday, Brian
Peters of the New York Fed advised Eichner at the SEC that the New York Fed was
“seeing some HFs [hedge funds] wishing to assign trades the clients had done with

Bear to other CPs [counterparties] so that Bear ‘steps out.’” Counterparties did not
want to have Bear Stearns as a derivatives counterparty any more.
Bear Stearns also encountered difficulties stepping into trades. Hayman Capital
Partners, a hedge fund in Texas wanting to decrease its exposure to subprime mort-
gages, had decided to close out a relatively small  million subprime derivative posi-
tion with Goldman Sachs. Bear Stearns offered the best bid, so Hayman expected to
assign its position to Bear, which would then become Goldman’s counterparty in the
derivative. Hayman notified Goldman by a routine email on Tuesday, March , at :
P.M. The reply  minutes later was unexpected: “GS does not consent to this trade.” 