March 28, 2008
After Bear went south, the Basel Committee on Banking Supervision announced that it would be revisiting its "Sound Practices for Managing Liquidity in Banking Organizations" guidance. The SEC then wrote the committee, in what looks to me like an effort prove that it was on the ball. I may sound like a broken record on this, but the SEC didn't used to have to justify its broker dealer supervision to the central bankers of other countries. It does now, though. A taste of what the agency said:
Bear Stearns' registered broker-dealers were comfortably in compliance with the SEC's net capital requirements, and in addition that Bear Stearns' capital exceeded relevant supervisory standards at the holding company level. Specifically, throughout the week of March 10 until the closing of the JP Morgan Chase transaction on Sunday March 16, Bear Stearns had a capital ratio of well in excess of the 10% level used by the Federal Reserve Board in its "well-capitalized" standard.
...the holding company had a pool of high quality, highly liquid assets of over $18 billion as of the morning of March 11. This was consistent with what the SEC had seen over the preceding weeks, during which SEC staff - both on-site and at headquarters - monitored the capital and liquidity positions of all the CSEs, in the case of Bear Stearns on a daily basis.
In accordance with customary industry practice, Bear Stearns relied day-to-day on its ability to obtain short-term financing through borrowing on a secured basis. Beginning late Monday, March 10, and increasingly through the week, rumors spread about liquidity problems at Bear Stearns, which eroded investor confidence in the firm. Notwithstanding that Bear Stearns continued to have high quality collateral to provide as security for borrowings, market counterparties became less willing to enter into collateralized funding arrangements with Bear Stearns.
After the jump, you can see how the SEC measured Bear's liquidity, up from $8.4 billion at the end of January to $21 billion by March 6, down to $2 billion during Bear's very bad final week.
From Cox's letter to Basel:
BSSC Net Capital ($ billion)
| Required | Excess | |
|---|---|---|
| 31-Dec | 1.26 | 3.38 |
| 31-Jan | 1.30 | 2.92 |
| 14-Mar | 1.27 | >2.00 (estimated) |
BS&Co. Net Capital ($ billion)
| Required | Excess | |
|---|---|---|
| 31-Jan | 0.56 | 2.71 |
| 14-Mar | 0.58 | >2.00 (estimated) |
Liquidity Pool ($ billion)
| 31-Jan | 8.4 |
| 4-Feb | 12.8 |
| 5-Feb | 15.8 |
| 6-Feb | 17 |
| 7-Feb | 16.1 |
| 22-Feb | 15 |
| 23-Feb | 15 |
| 24-Feb | 15 |
| 25-Feb | 18 |
| 26-Feb | 19 |
| 27-Feb | 19 |
| 28-Feb | 19 |
| 29-Feb | 19 |
| 1-Mar | 19 |
| 2-Mar | 19 |
| 3-Mar | 20 |
| 4-Mar | 20.1 |
| 5-Mar | 21 |
| 6-Mar | 21 |
| 7-Mar | 18 |
| 8-Mar | 18 |
| 9-Mar | 18 |
| 10-Mar | 18.1 (15.1 adjusted for customer protection rule) |
| 11-Mar | 11.5 (15.8 adjusted for customer protection rule) |
| 12-Mar | 12.4 |
| 13-Mar | 2 |
Holding Company Capital Ratio
| 31-Dec | 13.7% |
| 31-Jan | 14.4% |
| 29-Feb | 13.5% (estimated) |
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