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Univ. of Toledo College of Law

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Friday, April 4, 2008

Officials Testify on Bear Stearns Bailout at Senate Hearing

The headlines are all about the Senate Banking Committee hearing yesterday on the collapse of Bear Stearns, where federal officials, including Ben Bernanke, Christopher Cox, and Timothy Geithner (New York Federal Reserve) and company officials, including Alan Schwartz (Bear) and James Dimon (JPMorgan), testified about the days before the Bear-JPMorgan deal was struck.  Not a lot of new information came up, but the testimony describes a classic "run on the bank" that led to Bear's urgent need for financing on Friday March 14.  Alan Schwartz first thought, when the Fed offered financing that the firm had 28 days to find a solution to its problems, but later that day learned that Bear had to make a deal by Sunday evening -- he described it as an honest misunderstanding.  Treasury Secretary Paulson wanted the price for Bear stock to be low to deal with the moral hazard issue.  It has been widely reported that Bear officials are upset that the Fed did not begin lending directly to investment banks until after the Bear-JPMorgan deal, and that the availability of funds earlier could have saved Bear.  But that would not have happened, said Timothy Geithner, because the Fed only lends to healthy institutions.  When pressed about the possibility of market manipulation in the days before the collapse, Cox said the SEC was investigating.  NYTimes, Testimony Offers Details of Bear Stearns Deal ; WSJ, Officials Say They Sought
To Avoid Bear Bailout.

http://lawprofessors.typepad.com/securities/2008/04/officials-testi.html

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