liquidity plagues Bear Stearns

Brokerages break out the size of this emergency cash in their financial filings with the Securities and Exchange Commission. To gauge its sufficiency, the reserve can be compared to the main type of debt that brokerages rely on to finance their operations. This debt is called collateralized borrowing, because to get the loans the brokerages have to pledge assets as security to the creditor. If these creditors pull back sharply, a brokerage is in deep trouble. From public comments by Bear executives Friday, it appears much of the liquidity squeeze was caused by a pulling back by creditors that had extended loans based on collateral provided by Bear. These types of creditors "were no longer willing to provide financing," Samuel Molinaro, Bear's chief financial officer, said on the Friday call. Bear would have been particularly exposed to this withdrawal, because its emergency cash pile was small compared to this debt. On Nov. 30, that cash reserve of $17 billion was only about 17% of the $102 billion owed through secured financings. If the prices of assets Bear had pledged fell, the brokerage would have had to post a payment to the creditor called margin. One big purpose for the emergency funds is to have the cash to make margin payments during a credit-markets crisis. "My guess is that Bear did not adequately stress-test and didn't have enough liquidity to meet those margin payments," said Michael Peterson, director of research at Pzena Investment Management. Like Bear, Lehman is a big bond player and also one of the smaller Wall Street firms. But it is on sturdier ground than Bear, many investors said. "I'm pretty comfortable with Lehman's liquidity," said Mr. Peterson, whose firm owns Lehman shares. "The lessons of 1998 were not at all lost on Lehman." Aiming to make its balance sheet sturdier after 1998, Lehman became less reliant on short-term borrowing, which can dry up quickly. At the end of November, it had $28 billion in debt coming due in the following 12 months, well below the $34.9 billion in its liquidity reserve. "What gives me comfort right now is that Lehman has very little short-term debt," Mr. Peterson said. The firm's emergency-cash pile was 19% of its $182 billion in secured financings, putting it below the numbers for Goldman Sachs, Morgan Stanley and Merrill Lynch. At those firms the emergency cash was 38%, 39% and 34%, respectively, of collateralized financings. In a crunch, Lehman may be able to raise cash by selling another big pool of liquid assets, which is valued at more than $60 billion. Adding that to the liquidity cash reserve gives Lehman a potential $100 billion cash pile, equal to 54% of collateralized financing. That is ahead of some other brokers and far stronger than Bear's 31%. In addition, the debt that comes from the collateralized financing typically is matched by a similar loan to another customer, which creates an asset. When offset against each other, the collateralized financing liability becomes much smaller. In Lehman's case, it is about $20 billion, which is only about 60% of its emergency cash.