Wednesday, March 19, 2008

Faster than the SEC

Why didn't the SEC see the Bear Stearns collapse coming and do something? On March 11, three days before the Fed's action, reporters asked SEC Chair Christopher Cox if he was concerned about the Bear Stearns group. "We have a good deal of comfort about the capital cushions at these firms at the moment."

Jesse Westbrook for reports that in a statement issued three days later, the day the Fed stepped up to the plate, the SEC reiterated that as of March 11 Bear Stears had "a substantial capital cushion.''

Then all hell broke loose.

"Beginning on that day [] and increasingly throughout the week, lenders and customers [] began to remove funds from the firm,'' the SEC said. "As a result, Bear Stearns' excess liquidity rapidly eroded.'' In other words, Bear Stearns experienced an old-fashioned run. Its clients wanted their money and its usual sources of liquidity wanted nothing to do with it.

Bear Stearns Chief Executive Officer Alan Schwartz blamed dirty rumors for triggering the run.
He said: "We have tried to confront and dispel these rumors and parse fact from fiction.'' But, that didn't work. Once the stink is in, it's in.

Where was the SEC? It was "working closely'' with the Fed and the Treasury Department to ensure "orderly and liquid markets.''

"Criticizing SEC examiners is unfair,'' said Robert Neff, a former Bear Stearns risk manager. "They've become every bit as strong and vigilant as the Fed. The SEC just doesn't have the ultimate power of the checkbook.''

That's right Jimmy, this was a job for SuperFed. (I just checked. Providing a quick source of non-recourse liquidity is not among Superman's super powers.)

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