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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

Molinaro, Alix, and others spent the weekend in due diligence meetings with JP
Morgan and other potential buyers, including the private equity firm J.C. Flowers
and Co. According to Schwartz, the participants determined JP Morgan was the
only candidate with the size and stature to make a credible offer within  hours. 
As Bear Stearns’s clearing bank for repo trades, JP Morgan held much of Bear

Stearns’s assets as collateral and had been assessing their value daily. This knowl-
edge let JP Morgan move more quickly.
On Sunday, March , JP Morgan informed the New York Fed and the Treasury
that it was interested in a deal if it included financial support from the Fed. The

Federal Reserve Board, again finding “unusual and exigent circumstances” as re-
quired under section () of the Federal Reserve Act, agreed to purchase . bil-
lion of Bear’s assets to get them off the firm’s books through a new entity called
Maiden Lane LLC (named for a street alongside the New York Fed). Those assets—
mostly mortgage-related securities, other assets, and hedges from Bear’s mortgage
trading desk—would be under New York Fed management. To finance the purchases,
JP Morgan made a . billion subordinated loan and the New York Fed lent .
billion. Because of its loan, JP Morgan bore the risk of the first . billion of losses;

the Fed would bear any further losses up to . billion. The Fed’s loan would be
repaid as Maiden Lane sold the collateral.
On Sunday night, with Maiden Lane in place, JP Morgan publicly announced a
deal to buy Bear Stearns for  a share. Minutes of Bear’s board meeting indicate that
JP Morgan had considered  but cut it to  “because the government would not
permit a higher number. . . . The Fed and the Treasury Department would not sup-
port a transaction where [Bear Stearns] equity holders received any significant con-
sideration because of the ‘moral hazard’ of the federal government using taxpayer
money to ‘bail out’ the investment bank’s stockholders.” 
Eight days later, on March , Bear Stearns and JP Morgan agreed to increase the
price to . John Chrin, co-head of the financial institutions mergers and acquisi-
tions group at JP Morgan, told the FCIC they increased the price to make Bear share-

holders’ approval more likely. Bear CEO Schwartz told the FCIC the increase let
Bear preserve the company’s value “to the greatest extent possible under the circum-
stances for our shareholders, our , employees, and our creditors.” 

“IT WAS HEADING TO A BLACK HOLE”

The SEC regulators Macchiaroli and Eichner were as stunned as everyone else by the
speed of Bear’s collapse. Macchiaroli had had doubts as far back as August, he told
the FCIC, but he and his colleagues expected Bear would be able to fund itself
through the repo market, albeit at higher margins. 
Fed Chairman Ben Bernanke later called the Bear Stearns decision the toughest of
the financial crisis. The . trillion tri-party repo market had “really [begun] to
break down,” Bernanke said. “As the fear increased,” short-term lenders began de-
manding more collateral, “which was making it more and more difficult for the fi-
nancial firms to finance themselves and creating more and more liquidity pressure on