Conspiracy to Kill Bear Stearns?

Bear Stearns’ (BSC) liquidity dropped from $21B to $2B in 96 hours according to testimony in today’s Senate Banking Committees hearing. The SEC said Bear had adequate liquidity to last one year if it could not get any unsecured financing. But, the SEC did not consider that the door would be closed to Bear getting secured financing. Bear could not even get financing with treasuries as collateral. At the same time, Bear customers were rapidly withdrawing funds. The New York Federal Reserve Bank called it a “run on the bank”, and went on to say that Bear was not sound enough to be saved by access to funds from the Fed.

The SEC hinted that they are investigating the trading activity in Bear’s stock leading up to the meltdown. All of the witnesses at the hearing gave subtle hints that the refusal of secured financing may have been organized.

Both the Fed and the Treasury made it clear that “moral hazard” was critical in approving the JP Morgan (JPM) transaction. They made their intention clear, but they claimed that they did not dictate the stock price. The NY Fed said Bear’s credit line via JPM was not for 28 days, only up to 28 days. There is no doubt that the Fed and Treasury wanted a transaction over the weekend. Both the Fed and Treasury caused Bear to mislead investors on Friday, March 14.

Disclosure: Author is long BSC.

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