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MARCH : THE FALL OF BEAR STEARNS 

them. And, it was heading sort of to a black hole.” He saw the collapse of Bear Stearns
as threatening to freeze the tri-party repo market, leaving the short-term lenders
with collateral they would try to “dump on the market. You would have a big crunch
in asset prices.” 
“Bear Stearns, which is not that big a firm, our view on why it was important to
save it—you may disagree—but our view was that because it was so essentially in-
volved in this critical repo financing market, that its failure would have brought
down that market, which would have had implications for other firms,” Bernanke
told the FCIC. 
Geithner explained the need for government support for Bear’s acquisition by JP
Morgan as follows: “The sudden discovery by Bear’s derivative counterparties that
important financial positions they had put in place to protect themselves from finan-
cial risk were no longer operative would have triggered substantial further disloca-
tion in markets. This would have precipitated a rush by Bear’s counterparties to
liquidate the collateral they held against those positions and to attempt to replicate
those positions in already very fragile markets.” 
Paulson told the FCIC that Bear had both a liquidity problem and a capital prob-
lem. “Could you just imagine the mess we would have had? If Bear had gone there
were hundreds, maybe thousands of counterparties that all would have grabbed their
collateral, would have started trying to sell their collateral, drove down prices, create
even bigger losses. There was huge fear about the investment banking model at that
time.” Paulson believed that if Bear had filed for bankruptcy, “you would have had
Lehman going . . . almost immediately if Bear had gone, and just the whole process
would have just started earlier.” 

COMMISSION CONCLUSIONS ON CHAPTER 15

The Commission concludes the failure of Bear Stearns and its resulting govern-
ment-assisted rescue were caused by its exposure to risky mortgage assets, its re-
liance on short-term funding, and its high leverage. These were a result of weak
corporate governance and risk management. Its executive and employee compen-
sation system was based largely on return on equity, creating incentives to use ex-
cessive leverage and to focus on short-term gains such as annual growth goals.
Bear experienced runs by repo lenders, hedge fund customers, and derivatives
counterparties and was rescued by a government-assisted purchase by JP Morgan
because the government considered it too interconnected to fail. Bear’s failure
was in part a result of inadequate supervision by the Securities and Exchange
Commission, which did not restrict its risky activities and which allowed undue
leverage and insufficient liquidity.