On September 13, 2006, Bear Stearns published an "Investment Strategy" research report called - RAMIFICATIONS OF A U.S. HOUSING SLOWDOWN FOR EQUITIES...

Board Chairman Jimmy Cayne and CEO Alan Schwartz each knew the MBS collateral the firm used to secure its short term lending was distressed if not totally illquid.  Allowing the firm to reach that point without raising equity, selling the Company, or selling off mortgage securities was more than an error in judgment.  It was plain ignornance and incompetence by men who have a duty  to be knowledgeable and competent.   Bear's executives cannot be protected by the business judgment rule. 

January 30, 2009

"The financial crisis that has been wreaking havoc in markets in the U.S. and across the world since August 2007 had its origins in an asset price bubble that interacted with new kinds of financial innovations that masked risk; with companies that failed to follow their own risk management procedures; and with regulators and supervisors that failed to restrain excessive taking."

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With interest rates so low and with regulators turning a blind eye, financial institutions borrowed more and more money (i.e. increased their leverage) to finance their purchases of mortgage-related securities...  [Financial institutions] turned to short-term "collateralized borrowing" like repurchase agreements, so much so that by 2006 investment banks were on average rolling over a quarter of their balance sheet every night. During the years of rising asset prices, this short-term debt could be rolled over like clockwork. This tenuous situation shut down once panic hit in 2007, however, as sudden uncertainty over asset prices caused lenders to abruptly refuse to rollover their debts, and over-leveraged banks found themselves exposed to falling asset prices with very little capital."

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"[M]ore recently, insurance companies, investment banks and other parties did the near equivalent by selling "credit default swaps" (CDS), which were similar to monoline insurance in principle but different in risk, as CDS sellers put up very little capital to back their transactions."

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"[Mortgage Backed Securities (MBS), CDO's and Credit Default Swaps] enabled Wall Street to do for subprime mortgages what it had already done for conforming mortgages, and they facilitated the boom in subprime lending that occurred after 2000. By channeling funds of institutional investors to support the origination of subprime mortgages, many households previously unable to qualify for mortgage credit became eligible for loans. This new group of eligible borrowers increased housing demand and helped inflate home prices"

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"What is especially shocking... is how institutions along each link of the securitization chain failed so grossly to perform adequate risk assessment on the mortgage-related assets they held and traded."  

"[W]hen investment bank Bear Stearns collapsed last year, its assets were leveraged about 33 times over, meaning its debt-capitalization rate was somewhere north of 3,000 percent."