Banking & Capital Markets

Sudden Liquidity Crisis for Bear Stearns

The investment bank turns to JP Morgan and the Fed for funds after a cash-out blitz by clients and lenders.
Vincent RyanMarch 14, 2008

A sudden surge of “broad cash outflows” from counterparties and customers on Thursday forced Bear Stearns to tap JP Morgan Chase and the Federal Reserve for funds to shore up liquidity, the investment bank’s chief executive said Friday.

During a hastily convened conference call, CEO Alan Schwartz said the bank continued to have very strong liquidity in the first part of the week, but demands from prime brokerage clients, repo clients, and lenders to cash out late Thursday forced the move. Said CFO Sam Molinaro: “Counterparties that were providing secured financing against assets were no longer willing to provide financing. We lost a lot of capacity.” At the pace funds were being withdrawn, the firm recognized that there could be continued liquidity demands that would “outstrip our resources,” said Schwartz.

Under the agreement, JP Morgan will borrow funds from the Fed’s discount window and relend them to Bear Stearns for 28 days. The borrowing will be secured by Bear Stearns collateral. If the collateral falls in value, the Fed, not JP Morgan, will bear the risk.

Bear Stearns used JP Morgan for the deal because the commercial bank is its clearing agent for its collateral, said Molinaro, so “it was easy for them to see the kind and quality of collateral we have available and we could therefore move very quickly.”

The financing is a bridge to a more permanent solution, Molinaro emphasized. Bear Stearns has been consulting with investment bank Lazard LLC for months to explore strategic alternatives that “run the gamut,” he said, adding that any deal would both protect customers and maximize shareholder value.

In the meantime, Bear Stearns hopes to assuage the “significant amount of rumor and innuendo” about its position in the financial markets by moving up its first-quarter earnings release to Monday, March 17, after market close. At that time, it will disclose more information about its positions, said Molinaro.

Analysts have forecast a profit of 46 cents per share to $1.61 per share, and according to Schwartz, the company still expects to post numbers within that band. “I am aware of the wide range of estimates that analysts have out,” he said. “We continue to be comfortable that we will be within that range.”

Both Molinaro and Schwartz underscored that the liquidity situation at Bear Stearns deteriorated rapidly. It was just on Wednesday that Schwartz said on CNBC that the investment bank’s “balance sheet, liquidity, and capital remain strong” and that it had a $17 billion cushion to work with.

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