Why Didn’t Bear Use its Credit Lines?

I am mystified at the efforts by soon-to-be-ex chairman of Bear Stearns and still-barely-a-billionaire Joe Lewis, who took a large stake in the securities firm, to try to find another buyer for Bear.

My pet theory is that Lewis et all are bluffing, knowing they have a very bad hand, to scare bondholders and CDS owners to buy up the shares and are selling into their bid.

But as strange as that is, a stunning revelation came from a very senior Japanese executive, who sent these notes from a meeting with a top Japanese financial official:

The depth of the problems at Bear Stearns which led up to the buyout are not clear. Mr. X wondered why they did not try to use committed credit lines before agreeing to the JPM Chase deal. These lines were significant and included large amounts committed by Japanese banks, who are now relieved that they did not have to extend the credit.

Maybe Bear assumed at the rate of its cash depletion that it would burn through those credit lines quickly and being more leveraged might make other solutions more difficult, but the tone of the Japanese notes is that the credit lines were large enough in aggregate to have made a difference.

And even odder: those credit lines are still in place (although the downgrades by the rating agencies on Friday might have changed the pricing or reduced the size of facilities). Why did the Fed stump up a whole $30 billion? This seems a tremendous oversight on its behalf. Yes, those lines no doubt terminate upon a change in control, but if Bear draws them down, they become an obligation of JPM when the deal closes.

The Fed probably could have leaned on the banks to keep them in force. After all, they would be lending against a better balance sheet with JPM, although adding the Bear lines to whatever credit facilities they now have with JPM might put them over their limits for exposure to any one bank. But the Fed could have offered to backstop the excess, which would be a smaller commitment than the one it made.

After all, the whole logic of the Fed going to the lengths was to save the rest of the banking and securities industry, not Bear per se. The fear was that a bankruptcy filing would have lead to colossal disruption, possibly failures of other firms, and writedowns at other firms due to forced sales of securities. The Fed thus had considerable leverage to persuade other firms to go along, particularly since they were already obligated to lend to Bear. Syndicating the risk, particularly when the parties were already exposed, would have been a logical move.

Stranger and stranger….

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  1. S

    Maybe even more stunning is the Fuld is quoted in the jourtnal today saying that they are using the facility to “show leaderhsip.” I guess that is what you do when you are crouching behind the Fed. No better referendum on the investment banks than this statemen. Sheer absurdity.

  2. S

    S&P gets in the game with a watch on ratings for Goldman Sachs (NYSE:GS) and Lehman Brothers (NYSE:LEH) — with an implcit governement guarantee and all. Maybe Fuld was being ironic when he said that. Here is a bnk that was on its knees and the fed comes to its rescue. I thought hubris was out

  3. sk

    You are very good at posting links for your quotes – but I see no link to your revelations from a senior Japanese executive – can you add that ?


  4. Matt

    Another interesting facet is last night CNBC confirmed that the $30B loan has NOT actually been executed yet…

  5. Yves Smith


    Wish I could, but this was from some meeting notes that a long-standing colleague forwarded to me, not a public source. I’m not at liberty to identify him or the person he met with.

  6. TallIndian

    Here’s has a solution to the problem –the FED should allow dealers to print currency notes.

    We can eliminate the alphabet soup of TAF, PDCF, etc and get the same result!

    No money to pay a CDO tranche because of defaults No problemo,the underwriting dealer simply prints currency notes to make up any deficit.

    Dealers can print notes to put in bids at muni auctions.

    Of course, the FED would (and should) frown on the printing of notes to pay common stock dividends. (Pref stock is another story).

    This should be a temporary facility at least until the First Tuesday after the First Monday in November.

  7. Steve

    Well, maybe the Fed gave them a better rate :-)

    My guess is the Fed judged that the probability of Bear declaring bankruptcy even after drawing its unsecured lines increased the systemic risk, by adding the lenders’ exposure on top of all the other exposures.

    If I correctly recall the WSJ article giving the Thurs. night chronology, it said that the Fed was brought into the loop only after Schwartz contacted JPM. I doubt that.

  8. Yves Smith

    Anon of 9:37 PM,

    Thanks for the heads up. I probably would have seen it eventually, but it is better to be early in covering these things.

    I see CR linked to a paper by De Long that explains why this is a good idea. Betcha it assumes the only issue is liquidity, and it not exactly applicable to this situation.

    I was hoping to have a quiet evening…..oh well.

    My personal forecast is that the powers that be will keep throwing ammo that this situation all year, and it won’t be until 2009 that the recognition sinks in that this is bigger than their ability to solve. Then we might have a dim idea of how far down the bottom really is.

  9. S

    Exactly where is all this money coming from to buy this mortgage paper/. And exactly how does buying mortgage paper solve anything anyway. Socialism rolls on, history be damned!

  10. Yves Smith

    No, socialism would be giving the saps with underwater houses income support. This is a) wishful thinking and b) an effort to rescue institutions (and Pimco).

  11. Anonymous

    The Fed had to have a primary dealer whipping boy on display before they announced the creation of the Term Securities Lending Facility (TSLF) in order to moot calls of abetting moral hazard.

    Somebody had to be sacrificed and B&S was the most convenient.

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