Bear Stearns Collapse / JPMorgan Rescue (Mar 2008)

Introduction

Bear Stearns Companies, Inc. was one of the oldest and most storied investment banks on Wall Street, founded in 1923 and by 2007 the fifth-largest US investment bank by assets. Its collapse in March 2008 was the first major institutional failure of the global financial crisis and the event that demonstrated the fragility of the US financial system''s interconnections. The rescue arrangement — JPMorgan Chase acquiring Bear Stearns at a fraction of its peak value, backed by an unprecedented Federal Reserve emergency facility — raised immediate questions about the process, the pricing, and the role of the government.

The Hedge Fund Collapse: June 2007

The proximate origins of Bear Stearns'' collapse lie in two internal hedge funds: the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund, both managed by Ralph Cioffi and Matthew Tannin. The funds held heavily concentrated positions in collateralised debt obligations (CDOs) backed by subprime mortgages. As subprime mortgage default rates rose through early 2007, the CDO positions deteriorated. By June 2007 both funds had lost most or all of their value. Bear Stearns committed $1.6 billion to bail out the less-leveraged fund before withdrawing support; the Enhanced Leverage fund was wound down. Investor losses were substantial.

The hedge fund collapse alone did not bring down Bear Stearns, but it damaged the firm''s reputation and signalled its exposure to the subprime market to counterparties, prime brokerage clients, and funding providers.

The March 2008 Liquidity Crisis

By early March 2008 rumours about Bear Stearns'' liquidity were circulating in markets. Prime brokerage clients began withdrawing funds and collateral. Counterparties refused to roll over short-term financing. The firm''s liquidity pool — which stood at $18.3 billion on 10 March 2008 — had fallen to $2 billion by 13 March 2008. Bear Stearns could not fund itself overnight and faced imminent default.

Over the weekend of 15-16 March 2008, the Federal Reserve invoked Section 13(3) of the Federal Reserve Act — emergency lending powers not used since the Great Depression — to provide JPMorgan Chase with a $30 billion non-recourse loan, secured against a portfolio of Bear Stearns'' less-liquid assets transferred to a special purpose vehicle named Maiden Lane LLC. This facility allowed JPMorgan to acquire Bear Stearns without taking on the full credit risk of the illiquid portfolio.

JPMorgan''s initial offer of $2 per share — compared to Bear Stearns'' 52-week high of approximately $133 — was the subject of intense shareholder anger and litigation. The offer was raised to $10 per share on 24 March 2008 after shareholder pressure, with JPMorgan also increasing its exposure to the Maiden Lane portfolio.

The Cioffi and Tannin Criminal Trial

Ralph Cioffi and Matthew Tannin, the hedge fund managers, were charged by federal prosecutors with securities fraud, wire fraud, and conspiracy in June 2008. The government''s theory was that the two had privately acknowledged the funds were in distress while publicly reassuring investors. Private emails between the two — in which Tannin at one point wrote that the subprime market was "pretty bad" and that he feared the funds were in trouble — were central to the prosecution''s case. Both defendants argued the emails reflected normal market analysis rather than deliberate deception.

On 10 November 2009, after deliberating for six days, the jury in the Southern District of New York acquitted Cioffi and Tannin on all counts. The acquittal was a significant setback for the government''s broader effort to prosecute financial crisis misconduct.

The "Naked Short Selling" Conspiracy Theory

A persistent conspiracy framing attributes Bear Stearns'' collapse not to its hedge fund losses and resulting liquidity crisis but to coordinated "naked short selling" — the practice of selling shares short without first borrowing them, allegedly used by sophisticated actors to drive down Bear Stearns'' share price and trigger a self-fulfilling confidence collapse. Bear Stearns'' CEO Alan Schwartz and others publicly raised this framing during and after the collapse.

The SEC investigated the trading patterns around Bear Stearns'' collapse and found evidence of unusual short-selling activity but did not bring charges establishing that naked short selling caused the firm''s failure. The firm''s internal liquidity documentation — the fall from $18.3 billion to $2 billion in three days — reflects a funding withdrawal driven by counterparty decisions rather than share price movements as the primary mechanism.

Verdict

The collapse is confirmed and well-documented. The Maiden Lane facility, the acquisition mechanics, and the regulatory response are a matter of public record. The claim that the collapse was caused by coordinated naked short selling rather than fundamental balance sheet and liquidity problems is partially true in the sense that the collapse was real — but the coordinated-manipulation component lacks evidentiary support sufficient to displace the well-documented funding-withdrawal mechanism.

What Would Change Our Verdict

• Court findings or regulatory actions establishing that specific coordinated naked short selling was the primary cause of the liquidity collapse
• Documentary evidence of pre-arranged collusion between JPMorgan and federal officials to engineer Bear Stearns'' failure below intrinsic value