Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Unlike the implosion of ABCP, the “run on repo” was a surprise.14 Under British and American law, the holder of repo collateral is entitled to seize it ahead of any other claimant in the bankruptcy queue. So even allowing for Bear’s large portfolio of toxic mortgage-backed securities, its repo ought to have been good. A Treasury security is a Treasury security. Unfortunately for Bear, given that there were plenty of other counterparties to engage in repo trades with, no one wanted to take the risk of having to seize collateral from a failing bank, even if the collateral was as highly rated and as liquid as US Treasurys. When news of a new round of mortgage failures hit the markets in March 2008 and hedge funds began emptying their prime brokerage accounts, quite suddenly the haircuts Bear Stearns faced in the bilateral repo market steepened and access to trilateral repo funding was shut off. A bank that in early March had easily been able to raise $100 billion overnight in exchange for good collateral could no longer fund itself. On Thursday, March 13, with its liquidity reserve down to only $2 billion, Bear’s directors were told that $14 billion in repos would not “roll” the next day and that they were at imminent risk of running out of cash. This was a modern bank failure. There were no queuing depositors. Bear did not cater to pensioners. It died, because doubts about its business led it to be cut out of wholesale funding markets.