Members of a special panel
challenged former Bear Stearns’ executives on their view of what caused the big
Wall Street firm to implode two years ago.
The executives testified that they
did all they could to keep Bear Stearns afloat before it fell victim to an
unstoppable run on the bank. Its business strategy of borrowing funds from
rival firms was sound under the crimped credit market conditions at the time,
“In retrospect I don’t believe
that there was anything that Bear Stearns could have done differently with
respect to its funding model that would have prevent this run on the
bank,” said Paul Friedman, who was the firm’s chief operating officer for
Bear Stearns was the first Wall
Street bank to blow up. It was caught in the credit crunch in early 2008 and
foreshadowed the cascading financial meltdown in the fall of that year.
Unfounded concerns by brokerage
customers and rumours in the market about Bear Stearns’ solvency in the week of
10 March 2008 sparked the firm’s collapse, Friedman and other former executives
But Phil Angelides, chairman of the
Financial Crisis Inquiry Commission, pointed to the firm’s mounting dependence
on special loans from other investment banks, known as repurchase agreements.
Those loans fell outside the regulated market and added up to $50 billion to
$60 billion overnight in the period before the firm failed, Angelides said.
“At the end of the day, it
almost was the ultimate hand to mouth,” Angelides said.
The congressionally chartered
inquiry panel, which has been holding a series of hearings on the causes of the
crisis, is looking at Bear Stearns as a case history of an institution that
operated in the “shadow” banking system. The panel will hear testimony
Thursday by Treasury Secretary Timothy Geithner and former Treasury chief Henry
Paulson, the chief architect of the federal bailout.
“Our job is to find out how
the fire started. … Who was playing with matches,” Angelides said.