The first "run" on a major bank… quietly (March 14th, 2008)

In a conference call on Friday Alan Schwartz, CEO of Bear Stearns, spoke about the substantial withdrawal requests by investors.  Customers wanted their cash.  Banks typically do not keep much cash on hand.  When they speak of cash on hand, they use the term liquidity.  If you are extremely liquid, you have most of your assets in cash or equivalents.  If you are illiquid, you may have sizable assets but little cash.  The assets cannot easily be converted to cash.  If you own a $100,000 house with no debt, you have an asset, but until you sell that house you are illiquid.  Cash is needed for immediate financial demands.  Schwartz admitted that Bear Stearns was in a liquidity crisis.

Bear Stearns is an investment bank and a PRIMARY DEALER IN U.S. GOVERNMENT BONDS. There are only a handful of Banks allowed to participate as a dealer. Although Bear Stearns is sizable, the bank is the smallest of the top U.S. government bond dealers.  Like all major bond dealers, they traded in mortgage bonds and derivatives.  This is where the problems arose.  You may have heard that Bear Stearns was in trouble last summer.  Their troubles have not ended.  See:

The Federal Reserve cannot afford to let Bear fail.  If Bear Stearns were to fail, the whole global credit system would be at risk of a meltdown.  They will be merged with another investment bank.  What is an investment bank?  Investment banks help companies and governments raise money by issuing and selling securities in the capital markets (both equity and debt), as well as providing advice on transactions such as mergers and acquisitions. Until the late 1980’s, the United States and Canada maintained a separation between investment banking and commercial banks. (Wikipedia)

The fact that you and I know about this "run" is an indication that there will be more banks to experience this same reaction to the fragility of the system.  Implement your personal defense plan.  Live in moderation.  Prepare to help your loved ones who have failed to prepare… Love gives!

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