United States: Bear Stearns Emergency Liquidity Assistance, 2008

With total consolidated assets of nearly $400 billion, Bear was one of the largest securities firms in the US in March 2008. The firm was a participant in numerous markets, including investment banking, brokerage services, origination and securitization of mortgage loans, and securities and derivatives trading and clearing (Fed 2016). Bear materially financed itself in the short-term securities repo market; in August 2007, Bear borrowed between $50 billion and$70 billion in overnight funding. In November 2007, Bear’s leverage ratio reached nearly 38 to 1 (FCIC 2011; Fed 2009a).

At the time—and in the absence of supervisory information normally available to the Fed for its regulated depository institutions—the FRBNY initially relied on (a) an analysis of the size of the “hole” in the payments system that a Bear failure would leave and (b) the amount of Bear’s collateral to assess whether or not to make the bridge loan. Further FRBNY analysis revealed large credit default swap (CDS) positions covering Bear, which, if triggered, could have resulted in many other institutions having to pay out large obligations, which could have resulted in an asset fire sale, which in turn could have fueled a larger crisis (Silva 2020). Then–FRBNY Chief of Staff Michael Silva said that the FRBNY assessed Bear’s viability, which led to the conclusion that the FRBNY could “lend to Bear Stearns safely” (Silva 2020, 5–6).

In the week leading up to Bear’s collapse, its liquidity position dropped by $16 billion, its stock prices fell, and the cost of insuring its debt soared (FCIC 2011). Figures 2 and 3 show Bear’s daily liquidity position, common equity share market prices, and CDS premiums in the days and weeks before its collapse.

Source: FCIC 2011.

Sources: Refinitiv Datastream (LSEG); author’s analysis.

Bear’s presence in numerous markets and the potential for contagion to other similar firms “raised significant concern” about the stability of financial markets in the event of a Bear failure to meet obligations to counterparties (Fed 2016). The Fed said in a later report to Congress that a disorderly Bear failure could have resulted in dislocations to the market for short-term financing, wherein market participants likely would respond to a Bear failure by withdrawing from such short-term collateralized funding markets—a reaction that would threaten the liquidity and solvency of other large financial institutions^FNThen–FRBNY President Geithner worried about two specific institutions: Lehman Brothers and Merrill Lynch, which he thought would be first and second in line to fall in the event of a run on Bear (Geithner 2014). (Fed 2009a). Then–Fed Chairman Ben Bernanke told the FCIC that he worried that Bear’s potential collapse could have frozen the $2.8 trillion triparty repo market and resulted in repo market lenders having collateral that they might dump on the market, causing a sharp asset-price decline (FCIC 2011). He said that Bear’s failure “would have brought down [the triparty repo] market, which would have had implications for other firms” (FCIC 2011, 291). In congressional testimony, FRBNY President Timothy Geithner said that a Bear collapse would have resulted in “unpredictable but severe consequences for the functioning of the broader financial system and the broader economy, with lower equity prices, further downward pressure on home values, and less access to credit for companies and households” (Geithner 2008).

On March 14, 2008, the Fed Board authorized the FRBNY to make a collateralized bridge loan to Bear, through JPM. JPMC would extend loans to Bear, taking Bear’s collateral, and then post the collateral to the Fed’s discount window in a back-to-back loan—see Key Design Decision No. 4, Administration. At the close of business Friday, the Fed had lent JPMC $12.9 billion, secured by Bear assets valued at $13.8 billion. The Fed later reported that it made the bridge loan to Bear to “address the immediate liquidity needs of Bear Stearns and forestall the potential systemic disruptions that a default or bankruptcy of the company would have caused in the already stressed credit markets” (Fed 2016). According to the Fed:

The purpose of this bridge loan was to ensure that Bear Stearns would meet its obligations as they came due that day, allowing for time during the weekend for Bear Stearns to explore options with other financial institutions that might enable it to avoid bankruptcy and for policymakers to continue to seek ways to contain the risk to financial markets in the event no private-sector solution proved possible. (Fed 2016)

The minutes of the Fed Board’s March 14, 2008, meeting reported similarly that the bridge loan “would facilitate efforts to effect a resolution of the Bear Stearns situation that would be consistent with preserving financial stability” (Fed 2008a). In a conference call with analysts, Bear CEO Alan Schwartz said the bridge loan was “a bridge to a more permanent solution” (Bear 2008b, 4). JPMC said it was “working closely with Bear Stearns on securing permanent financing or other alternatives” (NYT 2008).

Other Options

Before pursuing the bridge loan, Bear had hired Lazard & Co., an advisory firm, to explore other options to combat its liquidity outflow. Lazard had advised Bear to request a liquidity facility from JPM, which Bear did on Thursday, March 13. JPMC denied the request, saying it couldn’t help without government support because of its own exposure to troubled mortgage assets (Bear 2008b; FCIC 2011). Also, on March 12, Bear’s legal counsel suggested to the FRBNY that it could bring forward the Term Securities Lending Facilities (TSLF) launch, which would allow Bear to swap illiquid assets for Treasury securities, but the facility wasn’t ready (Geithner 2014). On March 13, Bear’s repo desk had considered trying to raise funding by selling government-sponsored enterprise bonds, the sales of which wouldn’t be traceable to Bear in the market. That evening, Bear also considered selling other assets, but given that securities settlement was T 3, meaning that cash from the sale of securities wouldn't arrive for three business days, asset sales were of little help given that Bear needed cash in less than 24 hours (K. Kelly 2009).

In a special board of directors meeting held late at night on Thursday, March 13, Bear leadership discussed drawing on its existing credit lines from banks, but CEO Alan Schwartz said they may not be large enough to sufficiently help. Bear had $2.8 billion in unsecured credit lines but was facing $12 billion–$15 billion of outflows in a period of two days (Bear 2008c). Bear also had a $4 billion liquidity facility in the works, which, according to Bear, “had nothing to do with” the bridge loan, but it wouldn’t have become operational until the following month (Bear 2008b, 3). The board also discussed the possibility of not paying all demanded liquidity in cash. That evening, Bear was planning to file for bankruptcy the following morning, and the Securities and Exchange Commission (SEC) said it didn’t see a way to avoid such a filing. The board considered various bankruptcy options, which included putting the parent and some subsidiary organizations into bankruptcy (Bear 2008c; Geithner 2014). Another option some Bear leadership considered was what they called the “pencils down” plan, wherein Bear would not declare bankruptcy on Friday, but to avoid any potential fraud and to limit further losses, no one would trade, and they “wouldn’t actually do anything” (Cohan 2009, 63–64).

Early in the morning of Friday, March 14, as the board meeting resumed, Schwartz said that Bear was exploring a rescue package with Chris Flowers, a private equity investor, who might have provided a “few billion dollars” of equity and also provide a liquidity facility (Bear 2008c, 3). Before Bear and JPMC made the announcement of the bridge loan, Bear’s board considered requesting a delay in trading of its stock (Bear 2008c).

Although the Fed Board originally authorized the FRBNY to extend the bridge loan for up to 28 days, Fed policymakers decided after the market turmoil on Friday, March 14, that the Fed could not roll over the loan on Monday—as it deemed it necessary to make that the deadline for JPMC to finalize its acquisition of Bear (see Key Design Decision No. 9, Loan Duration) (Baxter 2018).

On Sunday, March 16, the Fed Board approved Fed support for JPM’s acquisition of Bear under Section 13(3) of the Federal Reserve Act. The FRBNY created Maiden Lane LLC, funded with a senior $28.8 billion FRBNY loan and $1.2 billion of subordinated funding from JPM. Maiden Lane bought $30 billion of risky assets from Bear to remove them from its balance sheet. Later that day, and with Maiden Lane in place, JPMC publicly announced its acquisition of Bear for $2 per share, which Bear and JPMC later increased to $10 per share (FCIC 2011). For more about JPM’s acquisition of Bear and about the Maiden Lane facility, see FRBNY (2024).

Section 13(3) of the Federal Reserve Act (12 U.S.C. § 343) provided the legal authority for the Fed to extend the bridge loan to Bear Stearns (Fed 2016). The bridge loan authorization was the first time the Fed had lent under Section 13(3) since the Great Depression. Section 13(3) permitted the Fed, “in unusual and exigent circumstances,” to provide liquidity “for any individual, partnership, or corporation” (US Congress 1913, sec. 13[3]). The invocation of Section 13(3) allowed the Fed to provide liquidity more broadly than its monetary policy and discount window authorities allowed (US Congress 1913).

Fed legal staff and policymakers interpreted Section 13(3)’s requirement that the Fed be “secured to [its] satisfaction” as meaning that the Fed had to be reasonably confident of full repayment (Alvarez 2022, 3). In other words, while the Fed might ultimately take some losses in 13(3) lending, it had to make the ex ante determination that it would be repaid to provide liquidity under Section 13(3) (Alvarez 2022).

Pursuant to Section 10(B) of the FRA, the Fed’s discount window authority was limited to depository institutions (GAO 2011; US Congress 1913). While the on-lending arrangement would not ordinarily have required Section 13(3) authority, the facts that all the collateral belonged to a nondepository institution and that the arrangement had no recourse to JPMorgan or any of its assets, the Fed Board determined that Section 13(3) authority was in fact required (Alvarez, Baxter, Jr., and Hoyt 2020). Therefore, in recognition of the fact that Bear was a nondepository institution, the Fed Board voted on March 14 to extend the bridge loan to Bear through JPMC under its Section 13(3) authority. Section 13(3) permitted a direct loan to Bear, but the Fed Board said it used JPMC as an intermediary because that was the structure that FRBNY lawyers had prepared late in the evening of Thursday, March 13, before the Board had considered whether to make a Section 13(3) determination (GAO 2011). According to Thomas Baxter, the FRBNY’s general counsel at the time, Tim Geithner instructed FRBNY legal staff to “figure out a way” to lend to Bear within “the space of a few hours,” so FRBNY legal staff decided to use the discount window and to use JPMC as an intermediary to satisfy the Section 10(B) depository institution requirement (Baxter 2018, 4). The New York Times reported, citing anonymous Fed staffers, that the Fed used JPMC as an intermediary “because it would be operationally simpler than a direct loan to Bear Stearns” (NYT 2008). Yet, the Fed still invoked Section 13(3) “because the loan was effectively for the benefit of Bear” (Bernanke 2015, 214).

The bridge loan was administered by the FRBNY (Fed 2016). The bridge loan was structured as a back-to-back transaction, wherein JPM^FNTechnically, the loan was made to JPMorgan Chase Bank, N.A., which was the largest bank subsidiary of JPMorgan Chase & Co. (GAO 2011). took the $13.8 billion in Bear collateral assets (see Key Design Decision No. 10, Balance Sheet Protection) and posted it as collateral to receive a secured loan from the FRBNY; JPM, in turn, on-lent the FRBNY loan to Bear. The bridge loan was made to JPMC as an overnight discount window loan (Fed 2009a). The reason the bridge loan was made through JPMC as intermediary was that the discount window was open only to commercial deposit-taking banks (which Bear was not, although the Fed could have made the bridge loan directly to Bear outside the discount window—see Key Design Decision No. 3, Legal Authority) (Broughman 2010). Although another deposit-taking bank could equally have played JPM’s intermediary role in the transaction, JPMC was Bear’s triparty repo clearing bank and thus was acquainted with and custodied much of Bear’s collateral (Baxter 2018; Geithner 2014). JPMC also could have faced severe losses from a midday Bear failure since it extended intraday credit to Bear in the triparty repo market and thus would have been left in the position of liquidating Bear’s collateral at fire-sale prices (FCIC 2011). The Fed used JPMC as an intermediary because of operational ease (see Key Design Decision No. 3, Legal Authority).

FRBNY General Counsel Baxter drew the idea for the back-to-back structure from the Doomsday Book—a binder on the FRBNY’s emergency powers—that he had helped to write years before (Geithner 2014). The Doomsday Book itself says that Section 10B lending could be used in this manner, but its authors thought it less necessary after 2001 revisions to the Federal Reserve Act:

Reserve Banks may extend Section 10B credit on a non-recourse basis. This permits back-to-back Section 10B lending, perhaps as an alternative to Section 13(3) discounting. (The need for this has decreased with the 2001 amendments to the Federal Reserve Act that relaxed the Board quorum requirement for Section 13(3) discounting.) [underlining in original; italics added] (FRBNY 2014)^FNThis language is taken from a June 2014 version (version 4.1) of the Doomsday Book. However, its version history documentation does not appear to indicate that any changes were made to this language after the Global Financial Crisis of 2007–2009 (GFC; the last revisions appear to have been made in 2004), so this language is likely the GFC-era language. Notably, though, the Doomsday Book version history documentation does note that an older back-to-back lending agreement, relying only on Section 10B and designed as an alternative to Section 13(3) lending, was deleted in October 2000 on the basis that, before the 2001 revisions to the Federal Reserve Act, Section 13(3) lending required the consent of at least five governors, the physical and logistical difficulty of which seemed to necessitate having a Section 10B alternative (FRBNY 2014). The Doomsday Book also says that pure Section 10B back-to-back lending would have “[needed] substantial revision to be workable” on account of its collateral policies (FRBNY 2014, 14–15).

Section 129 of the Emergency Economic Stabilization Act (EESA, which later provided the necessary funding for the Troubled Assets Relief Program) required the Fed to report to the House Committee on Financial Services (House Financial Services) and to Senate Banking on any use of its Section 13(3) authority within seven days of invoking that authority (see Key Design Decision No. 6, Communication and Disclosure) (US Congress 2008, sec. 129[a]).

The Government Accountability Office (GAO) completed a review of the Fed’s emergency lending assistance during the Global Financial Crisis of 2007–2009 (GFC), inclusive of the bridge loan. The GAO report’s coverage of the bridge loan was largely factual and did not otherwise contain any evaluation of the bridge loan (GAO 2011).

The Treasury and Fed officially briefed congressional majority leaders throughout the weekend on the bridge loan and JPM’s acquisition planning. Fed Chair Bernanke spoke with House Financial Services Chair Barney Frank on Friday, and Fed staff sent Congressman Frank an email update on Sunday (Sidel et al. 2008). Senate Banking Chair Christopher Dodd said, “I believe this is the right action that was taken over the weekend . . . to allow this to go into bankruptcy, I think, would have [created] some systemic problems that would have been massive” (Sidel et al. 2008). In a public press release issued on the day of the bridge loan—March 14—Senator Dodd said:

This morning’s announcement of steps taken by the New York Fed to assist one of America’s largest investment banks is yet the latest example of the challenges facing our economy, our markets, and hard-working American citizens. While the impact of today’s and other recent steps of intervention taken by the Fed will not immediately be known, I firmly believe that additional, equally aggressive measures should be taken to provide liquidity to the markets and stability to the millions of homeowners and families facing the threat of foreclosure. (Dodd 2008)

Just before 9:00am on Friday, March 14, JPMC announced it would lend to Bear for up to 28 days. Its press release did not mention the size of the lending (JPMC 2008). At roughly the same time, FRBNY President Geithner and Treasury Secretary Paulson addressed bond dealers and bankers in a conference call. Paulson said that the larger dealer community had a stake in the bridge loan arrangement working out (Sidel et al. 2008). In response to numerous questions about the bridge loan facility, “little new information . . . was given” (K. Kelly 2009, 78–79).

Shortly after 10:15am, the Fed issued a press release saying that it was “monitoring market developments closely” and that “the [Fed] Board voted unanimously to approve the arrangement announced by JPMorgan Chase and Bear Stearns this morning” (Cohan 2009, 71; Fed 2008b;).

Bear held a conference call for investors at 12:30pm On the call, they provided details about Bear’s liquidity position, the strategic options it was pursuing, and the bridge loan (Bear 2008b; Cohan 2009, 72). In the call, Bear CEO Alan Schwartz called the bridge loan “a bridge to a more permanent solution” (Bear 2008b, 4). JPMC said it was “closely working with Bear Stearns on securing permanent financing or other alternatives” (NYT 2008).

At roughly 2:00pm, S&P downgraded Bear’s credit ratings, with Moody’s and Fitch quick to follow suit (FCIC 2011; S&P 2008). Given the limited information in the press releases, the market was to some degree unsure about what the action entailed or why it had been done; for example, one CNBC anchor said that he wasn’t sure if the bridge loan was meant to reassure markets and restore confidence in Bear Stearns, or whether “there was something in terms of a potential loss” and the bridge loan was a form of financing-in-resolution (Cohan 2009, 70). According to Cohan:

Even though there were virtually no details of how the JPMorgan loan would work, the market was quickly forming the view that the very fact that the Fed had had to step in and arrange for this facility meant that the situation at Bear Stearns was tenuous at best. (Cohan 2009, 71)

In its Section 129 report to Congress, the Fed said it made the bridge loan to “forestall the potential systemic disruptions” that could be caused by a disorderly Bear failure (Fed 2009a, 3).

In its Sunday, March 16, press release announcing its acquisition of Bear, JPMC did not mention the bridge loan (JPMC and Bear 2008).

There was confusion about the duration of the bridge loan among Bear, the Fed, and JPMC (Baxter 2018). On the morning of Friday, March 14, 2008 (at about 6:45am), JPMC told Bear that it would make the bridge loan available “as necessary” for up to 28 days (K. Kelly 2008). FRBNY General Counsel Thomas Baxter said that the bridge loan was structured only as an overnight loan and that that fact was clear from the loan documents (which would have been signed before the bridge loan’s execution, which occurred at about 7:30am) (Baxter 2018; Silva 2020). Minutes before 9:00am, JPMC issued a press release to the public, saying it would lend “for an initial period of up to 28 days” [emphasis added], and Bear’s press release used identical language (Bear Stearns 2008a; JPMC 2008; New York Times 2008).

At that time, Bear executives “thought they had four weeks” to find a longer-term solution: time to raise capital or sell assets, divisions, or even potentially the company (Cohan 2009, 68; K. Kelly 2008). On Bear’s Friday conference call hours after the announcements of the bridge loan, investors and Bear executives discussed the bridge loan as a 28-day loan (Bear 2008b). Shortly after the bridge loan announcement, at 9:15am, CNBC anchor David Faber reported that “JPMorgan is basically saying to Bear Stearns, ‘We’re there for you for twenty-eight days,’ and the Fed is saying to JPMorgan, ‘We’re there for you’” (Cohan 2009, 70). The Wall Street Journal and S&P reported that the Fed made the bridge loan for 28 days, while MarketWatch reported that the duration of the loan was unknown (Ip 2008; Robb 2008; S&P 2008).

The loan was structured as an overnight loan, but it is possible that the bridge loan was initially intended to be rolled for 28 days (see Key Design Decision No. 9, Loan Duration). Tim Geithner later said he didn’t understand the confusion about the loan facility and that the only publicly available terms about the facility were those published by JPMorgan, which said “up to twenty-eight days” and that the Fed Board had approved the JPMorgan arrangement (Cohan 2009, 83–84). However, he noted, they [the Fed and Treasury] had given Bear a Sunday night deadline to find a solution (Cohan 2009).^FNDuring the weekend negotiations, Bear leadership did consider a “nuclear card,” by which it would refuse a proposed JPMorgan (or other) offer and threaten to file bankruptcy, with the thought that the threat of such a bankruptcy and its resultant systemic consequences would bring the Fed and JPMorgan to the table and buy Bear more time (“for instance, a real twenty-eight days” [emphasis in original]) (Cohan 2009, 91).

At 6:30pm on March 14, Treasury Secretary Paulson and FRBNY President Geithner told Bear CEO Schwartz that the bridge loan would be available only over the weekend, since “there [would] be nothing left to lend against” if Bear didn’t obtain a deal over the weekend (Paulson 2010, 105). Bear executives were surprised when the Fed said that the bridge loan would be available only for the weekend: one Bear employee familiar with the bridge loan financing said, “we thought they gave us 28 days . . . then they gave us 24 hours” (Sidel et al. 2008). The minutes of the Fed Board meeting from March 14, 2008, which the Fed released in June 2008, reported that the Section 13(3) loan that it authorized “should not exceed a period of 28 days” (Fed 2008a, 2; Fed 2008e). The Fed Board minutes from March 16, 2008 (also released in June 2008), discussing the JPMC acquisition of Bear said that “the evidence available to the Board indicated that Bear Stearns would have difficulty meeting its repayment obligations the next business day. Significant support, such as an acquisition of Bear Stearns or an immediate guarantee of its payment obligations, was necessary to avoid serious disruptions to financial markets” (Fed 2008c, 2–3).

On Tuesday, March 11, the Fed announced the creation of the Term Securities Lending Facility to provide liquidity to investment banks (FCIC 2011; GAO 2011). However, the announcement only served to elevate concerns about Bear. Richard Bove, a well-known analyst, told clients on Tuesday that the TSLF “may have been strongly influenced by Bear Stearns’s problem.” Charlie Gasparino picked up on that report on CNBC to say “the market was saying” that (Cohan 2009, 24–25).

On June 27, 2008, the Fed Board released its normally confidential meeting minutes from its March 14 and March 16 meetings related to Bear Stearns. The March 14 minutes provide a brief description of the Board’s discussion, the terms of the bridge loan, and the justifications and votes for invoking Section 13(3) of the Federal Reserve Act (Fed 2008a; Fed 2008c; Fed 2008e). In its 2008 annual report, the Fed Board disclosed the existence—but not the details—of the bridge loan (Fed 2009c). In its 2008 annual report, the FRBNY did not mention the bridge loan (FRBNY 2009). Bear did not file a Form 8-K report with the SEC upon receiving the bridge loan. While JPM’s 2008 annual report discussed its acquisition of Bear at length, it did not discuss the bridge loan (JPMC 2009).

The Yale Program on Financial Stability requested a copy of the bridge loan documentation through a Freedom of Information Act (FOIA) request, but the FRBNY declined to provide it.

Neither JPM’s nor the Fed’s press releases announced the size of the loan, and senior Fed staffers also declined to disclose the size to journalists (Federal Reserve 2008; JPMC 2008; New York Times 2008). The amount of lending would have been limited by the amount of eligible collateral Bear had at the time (see Key Design Decision No. 3, Legal Authority; see Key Design Decision No. 10, Balance Sheet Protection). Indeed, MarketWatch cited Fed staff saying that the size of the loan wasn’t certain and would depend on Bear’s credit needs and available collateral (Sidel et al. 2008). Minutes of Bear’s Thursday night board meeting report that “the Board was told that there was $14 billion dollars in collateral that could be lent against” (Bear 2008c, 2). The Fed lent $12.9 billion to Bear against $13.8 billion of collateral (Fed 2016).

Discount window data released in response to a Bloomberg FOIA request shows JPMorgan’s $12.9 billion of borrowing for an “Emergency Loan through Chase Bear Stearns” on Friday, March 14, with a maturity date of Monday, March 17 (Fed 2008f; Fed n.d.).

The interest rate charged on the bridge loan was the primary credit rate, which on March 14, 2008, was 3.5%^FNThe Fed’s Section 129 disclosure said that the rate charged on the bridge loan was the primary credit rate, which was 3.5% at the time, but later it also said the rate charged was 2.25% (Fed 2009a). Three additional Fed sources corroborate the 3.5% rate (Fed 2016; Fed n.d.; FRED n.d.). (Fed 2016; Fed n.d.; FRED n.d.).

At the time, Regulation A—the rules written by the Fed to govern its provision of liquidity under Section 13(3), among other things—called for all Section 13(3) lending to be provided at an interest rate “above the highest rate in effect for advances to depository institutions” (Fed 2015). This would suggest a rate higher than the primary credit rate, the Fed’s discount window rate (and perhaps higher than the secondary credit rate available to banks at a premium to the primary credit rate). However, the Fed regularly made exceptions to this rule in providing emergency credit during the GFC (Fed 2009b; S. Kelly 2021). Minutes of the Fed Board meeting approving the bridge loan said that the Board “approved the New York Reserve Bank’s recommendation that the credit to JPMC Bank to provide financing to Bear Stearns” be at the primary credit rate (Fed 2008a, 2–3). Moreover, as noted previously, Fed officials originally prepared the loan as a discount window loan, and ultimately left it structured as a back-to-back loan through the discount window.

The communication of the duration of the bridge loan was the subject of some confusion (see Key Design Decision No. 6, Communication and Disclosure). The minutes of the Fed Board meeting from March 14, 2008, which remained confidential until June 2008, reported that Board members had agreed the Section 13(3) loan “should not exceed a period of 28 days” (Fed 2008a, 2). On Friday, March 14, JPMC and Bear separately announced that JPMC would lend to Bear “for an initial period of up to 28 days” (Bear Stearns 2008a; Fed 2008e; JPMC 2008). Bear’s executives initially understood the loan to mean they had 28 days to work out the company’s problems (Cohan 2009).

However, it quickly became apparent to Fed policymakers that they needed to find a solution by the end of the weekend. The Fed Board minutes from the meeting on Sunday, March 16, 2008, discussing the JPMC acquisition of Bear said that “the evidence available to the Board indicated that Bear Stearns would have difficulty meeting its repayment obligations the next business day. Significant support, such as an acquisition of Bear Stearns or an immediate guarantee of its payment obligations, was necessary to avoid serious disruptions to financial markets” (Fed 2008c, 2–3).

In a 2018 interview, former New York Fed General Counsel Baxter said the Fed structured the bridge loan as an overnight loan, but that did not count weekend days, so the total loan was made overnight from Friday to Monday morning; the duration of the bridge loan in effect created the deadline by which JPMC had to complete its Bear acquisition (Baxter 2018). Baxter said there was no guarantee that JPMC would in fact acquire Bear on Friday when the FRBNY extended the bridge loan; nonetheless, there was “no implied suggestion from the Fed” that it would renew the bridge loan on Monday morning (Baxter 2018, 5). It is possible that the Federal Reserve Board in its early-morning meeting, or the FRBNY leadership, had initially intended (and possibly communicated that they intended) to renew the bridge loan for a period of up to 28 days. (The TSLF, announced on March 11, was going to provide liquidity for up 28 days when it opened later that month [FCIC 2011].)

On Friday night, Tim Greene, co-head of Bear’s repo desk, told senior managing director Paul Friedman of the duration of the bridge loan: “They’re [JPMorgan] saying it runs out Sunday night . . . it’s a one-day facility. We’ll decide later on whether we want to renew it for more days, up to 28,” after Geithner and Paulson had advised that a deal must be made by Sunday night, with no extensions (Cohan 2009, 82–83).

On the morning of Monday, March 17, 2008, Bear repaid the bridge loan to the FRBNY in full ($12.9 billion) with roughly $4 million in interest (Fed 2016).

The Fed ultimately lent Bear $12.9 billion under the bridge loan, secured by Bear assets worth $13.8 billion, an average 6.5% haircut to market value (Fed 2016). Figure 4 shows the Bear assets that secured the bridge loan, by asset class.

JPM applied haircuts to the Bear collateral to determine its lendable value, and the FRBNY’s Financial Institution Supervision Group reviewed those haircuts (Fed n.d.; GAO 2011). The senior vice president of the markets group at the FRBNY, in an interview with the Yale Program on Financial Stability, described the difficulty the FRBNY faced when accepting collateral for the bridge loan:

That decision [to lend to Bear under Section 13(3)] was, of course, contingent on the fact that Fed staff had to go in and look at the collateral, and so the FRBNY gathered up people to go evaluate the collateral. At the discount window, banks all pre-pledge collateral. We know what it is . . . With Bear, the Fed has none of that. We’d never seen their collateral. The Fed didn’t regulate them. Previously, the Fed had no authority to look at their books. They had never pre-pledged any risky collateral to the FRBNY discount window because they weren’t allowed to borrow.^FNSo unfamiliar was the FRBNY with Bear that when an FRBNY supervisory officer asked where Bear was located in order to dispatch a team to inspect its books, FRBNY Chief of Staff Michael Silva replied, “I don’t know. Google it” (Silva 2020, 3). (Mosser 2018, 17)

The bridge loan was nonrecourse to JPM; according to the FRBNY’s general counsel, JPMC was not comfortable putting its own credit on the line, instead requiring nonrecourse lending through the bridge loan (Baxter 2018). However, it was with recourse to Bear (Fed 2009a; GAO 2011). While JPMC would technically take the loan from the Fed, if in its on-lending Bear defaulted, the loss would have been passed on to the FRBNY, which would have had recourse to Bear’s balance sheet beyond its collateral posted at the discount window (collateral provided to the discount window by JPMC on behalf of Bear) (Baxter 2018).

FRBNY President Geithner said in a retrospective analysis that, while the FRBNY insisted on sufficient collateral to secure the Fed to its satisfaction, “in reality, we’d be taking some risk” (Geithner 2014, 151).

Fed Chairman Bernanke explained in his memoir of the crisis that he believed taxpayers would have suffered if the Fed didn’t receive payment in the event of a Bear default; for that reason, he wrote, he asked Secretary Paulson to get the president’s approval for the bridge loan. Hours before the announcement of the bridge loan on that morning of Friday, March 14, President Bush gave his approval (Bernanke 2015). On that Friday morning, Chairman Bernanke told Secretary Paulson that the Fed would make the bridge loan to Bear only if Treasury agreed to guarantee the Fed (specifically, Bernanke said, “I’m prepared to go ahead here only if Treasury is supportive and prepared to protect us from any losses”) in its lending, to which Secretary Paulson responded, “I’m prepared to do anything” (Paulson 2010, 101). Ultimately, the Treasury did not extend a guarantee.^FNThe Fed similarly sought a Treasury guarantee for its Maiden Lane facility established to help JPMC acquire Bear over the weekend, but Treasury lawyers said that, absent congressional approval, Treasury lacked the legal authority to do so (Geithner 2014). The following Monday, however, when the Fed and JPMC rolled the bridge loan into the Maiden Lane facility to facilitate JPM’s acquisition of Bear, Secretary Paulson wrote a letter to Geithner saying that the Treasury supported the Fed’s action and recognized that any loss from the facility could reduce the Fed’s net earnings transferred to the Treasury (Paulson 2008).

Minutes of Bear’s board meeting on the night of Thursday, March 13, reported that “there was $14 billion in collateral that could be lent against” (Bear 2008c, 2). The Fed lent $12.9 billion against $13.8 billion of collateral. The FCIC reported that Bear ended Friday, March 14, “out of cash” (FCIC 2011, 289).

That evening, Treasury Secretary Paulson and FRBNY President Geithner told Bear CEO Schwartz that the bridge loan would be available only over the weekend, since “there [would] be nothing left to lend against” if Bear didn’t obtain a deal over the weekend (Paulson 2010, 105). Policymakers also insisted that any deal include JPMC immediately standing behind all of Bear’s obligations, even though the deal wouldn’t close immediately (Geithner 2014). On Sunday, March 16, JPMC announced it would acquire Bear Stearns and back its obligations until the merger was finalized (JPMC and Bear 2008). On Monday, March 17, with JPM’s backing, Bear paid off the Fed bridge loan with nearly $4 million of interest (Fed 2009a). 

The week of Bear’s rescue marked the start of several weeks of sharp monetary sterilization by the Fed (FRBC n.d.). From March 12 to April 23, the Fed substantially sold^FNInitially, the Fed’s sterilization policy was to let maturing short-term Treasury securities mature and “roll off” without replacing them. As the sterilization needs grew—but before the Fed could remunerate reserves—it began to actively sell the securities. amounts of its securities holdings. The Fed effected these sales to keep its monetary policy rate around its target, per Chairman Bernanke: 

We needed to continue our emergency lending and at the same time prevent the federal funds rate from falling below 2 percent. Thus far, we had successfully resolved the potential inconsistency by selling a dollar’s worth of Treasury securities from our portfolio for each dollar of emergency lending. The sales of Treasuries drained reserves from the banking system, offsetting the increase in reserves created by our lending. This procedure, known as sterilization, allowed us to make loans as needed while keeping short-term interest rates where we wanted them.^FNLater in 2008, the Fed would receive sterilization help from the Treasury’s Supplementary Financing Program, and Congress accelerated to October 2008 the authorization for the Fed to pay interest on reserves (which was initially authorized to take effect in October 2011) (Fed 2009c).(Bernanke 2015, 237)

It isn’t clear from the Fed’s public statements whether the Fed specifically sterilized the Bear bridge loan, which was relatively small and outstanding over only one weekend. Figure 5 shows the Fed’s balance sheet of traditional securities holdings during 2008 (FRBC n.d.).

While the Fed attached some conditions to the potential renewal of the bridge loan (such as acquisition by another private sector entity), research uncovered no other conditions associated with the bridge loan.