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478 Dissenting Statement

pool—AAA-rated PMBS—as a useful source of repo fi nancing. According to the
Commission staff ’s Preliminary Investigative Report on Bear, prepared for hearings
on May 5 and 6, 2010, 97.4 percent of Bear’s short term funding was secured and
only 2.6 percent unsecured. “As of January 11, 2008,” the FCIC staff reported,
“$45.9 billion of Bear Stearns’ repo collateral was composed of agency (Fannie and
Freddie) mortgage-related securities, $23.7 billion was in non-agency securitized
50
asset backed securities [i.e., PMBS], and $19 billion was in whole loans.” Th e
Agency MBS was unaff ected by the collapse of the PMBS market, and could still be
used for funding.
Th us, about 27 percent of Bear’s readily available sources of funding
consisted of PMBS that became unusable for repo fi nancing when the PMBS market
disappeared. Th e loss of this source of liquidity put the fi rm in serious jeopardy;
rumors swept the market about Bear’s condition, and clients began withdrawing
funds. Bear’s offi cers told the Commission that the fi rm was profi table in its fi rst 2008
quarter—the quarter in which it failed; ironically they also told the Commission’s
staff that they had moved Bear’s short term funding from commercial paper to MBS
because they believed that collateral-backed funding would be more stable. In the
week beginning March 10, 2008, according to the FCIC staff report, Bear had over
$18 billion in cash reserves, but by March 13 the liquidity pool had fallen to $2
51
billion. It was clear that Bear—solvent and profi table or not—could not survive a
run that was fueled by fear and uncertainty about its liquidity and the possibility of
its insolvency.
Parenthetically, it should be noted that the Commission’s staff focused on Bear
because the Commission’s majority apparently believed that the business model of
investment banks, which relied on relatively high leverage and repo or other short
term fi nancing, was inherently unstable. Th e need to rescue Bear was thought to be
evidence of this fact. Clearly, the fi ve independent investment banks—Bear, Lehman
Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs—were badly damaged
in the fi nancial crisis. Only two of them remain independent fi rms, and those two
are now regulated as bank holding companies by the Federal Reserve. Nevertheless,
it is not clear that the investment banks fared any worse than the much more heavily
regulated commercial banks—or Fannie and Freddie which were also regulated
more stringently than the investment banks but not as stringently as banks. Th e
investment banks did not pass the test created by the mortgage meltdown and
the subsequent fi nancial crisis, but neither did a large number of insured banks—
IndyMac, Washington Mutual (WaMu) and Wachovia, to name the largest—that
were much more heavily regulated and, in addition, off ered insured deposits and
had access to the Fed’s discount window if they needed emergency funds to deal
with runs. Th e view of the Commission majority, that investment banks—as part of
the so-called “shadow banking system”—were special contributors to the fi nancial
crisis, seems misplaced for this reason. Th ey are better classifi ed not as contributors
to the fi nancial crisis but as victims of the panic that ensued aft er the housing bubble
and the PMBS market collapsed.
Bear went down because the delinquencies and failures of an unprecedentedly
large number of NTMs caused the collapse of the PMBS market; this destroyed the
50 FCIC, “Investigative Findings on Bear Stearns (Preliminary Draft ),” April 29, 2010, p.16.
51 Id., p.45.