Liquidity Development
On February 29, 2008, the Company had available liquidity at the parent companyequal to $17.3 billion. However, over the course of the week of March 10, marketspeculation was that Bear Stearns was experiencing a serious liquidity problem.On the evening of March 10, 2008, the Company issued a press release denying themarket rumors. On Wednesday, March 12, 2008, the Company disclosed that its liquidity position was largely unchanged since the beginning of the year as contrasted with the unsubstantiated market rumor and speculation. During the course of the day on March 12, 2008, however, an increased volume of customers expressed a desire to withdraw funds from and certain counterparties expressed increased concern regarding maintaining their ordinary course exposure to Bear Stearns. Over the course of the day on March 13, 2008, an unusually high number of customers withdrew funds and a significant number of counterparties and lenders were unwilling to make secured financing available on customary terms,which resulted in a sharp deterioration in the Company's liquidity position. As of the evening of March 13, 2008, available liquidity declined materially and expected funding requirements on March 14, 2008 were significantly in excess of available liquidity. The inability to borrow against high quality collateral and rapid withdrawal of customer funds contributed to the liquidity issues. On the morning of March 14, 2008, the Company issued a press release announcing that it had obtained a secured lending facility from JPMorgan Chase and that it was discussing permanent financing and other alternatives with JPMorgan Chase. Despite this announcement, throughout the day on March 14, 2008, customerscontinued to withdraw funds at an increasing rate and counterparties continuedto seek to reduce their exposure to the Company also at an increasing rate. On the evening of March 14, 2008, the Company was informed that the secured lending facility that had been entered into earlier that day would not be available onMarch 17, 2008. On March 16, 2008, the Company and JPMorgan Chase entered into the agreement and plan of merger. JPMorgan Chase issued the Guaranty (as definedin Note 17) of the Company's trading and certain other obligations.
Despite the financial support from the merger agreement and the Guaranty, theCompany's liquidity position continued to deteriorate, customers continued towithdraw funds and funding (other than from JPMorgan Chase and the New York Fed)was not available. As of March 21, 2007, management estimated that Bear Stearnshad little to no available liquidity. On March 24, 2008, the Company andJPMorgan Chase entered into the amendment to the agreement and plan of merger,the share exchange agreement and certain other ancillary transaction documentsand JPMorgan Chase issued the guaranty to the New York Fed and the amended andrestated operating guaranty, which clarified and enhanced the terms of theguaranty. As of February 29, 2008, the market value of eligible unencumbered, unhypothecated financial instruments owned by the Company was approximately$14.4 billion with a borrowing value of $12.3 billion. These eligible assets areprimarily comprised of U.S. equities and residential and commercial mortgage whole loans, mortgage- and asset-backed securities, investment grade municipaland corporate bonds. The vast majority of advance rates on these different assettypes are 70% or higher, and as described above, is based predominantly on committed, secured facilities that the Company and its subsidiaries maintain indifferent regions globally. The liquidity ratio, explained above, based solely on Company-owned securities, has averaged 161% over the previous 12 months, including the Company's $2.9 billion unused committed unsecured bank credit, and 145%, excluding the committed unsecured revolving credit facility. On this samebasis, as of February 29, 2008 the liquidity ratio was 183% and 167%,respectively. The Company monitors unrestricted liquidity available to the Parent Company viathe ability to monetize unencumbered assets held in unregulated and regulatedentities. As of February 29, 2008, approximately $4.5 billion of the marketvalue identified in the liquidity ratio data above was held in unregulated entities and thus likely to be available to the Parent Company. The remaining$9.9 billion market value of unencumbered securities was held in regulatedentities, a portion of which may not be available to provide liquidity to theParent Company. As of February 29, 2008 the Parent Company Liquidity Pool was $17.3 billion comprised entirely of money market funds, bank deposits and short-term high quality money market investments. Liquidity comparison with Q4 07 Collateral --Eligible collater borrowing value $12.3, declining from $14 bil --parent unregulated $4.5 bil, dropping from $5.1 bil Excess Liquidity --17.3 bil, down from $17.4 bil Total available liquidity around 30 bil, 10% of liability
Asset Quality
Mortgages, mortgage- and asset-backed Level 3, 22 bil exposure, 1.5 bil writedown in Q1 07.
At November 30, 2007, the Company had approximately $46 billion of mortgages,mortgage backed and asset backed securities including approximately $12 billionof floating rate commercial loans and approximately $3 billion of fixed ratecommercial loans.
Conclusions: --Until March 10, Bearn Stearns has similar position as Dec 31th, 2007 --Liqidity issues caused the company to collapse. Its excess liquidity is too few (17 bil, 5% of liability) to hold up until secured lending was available. --Overall liquidity is around 10%, not fewer
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