Mar 7 & Mar 11, 2008 - Two Fed Moves Backfire, Triggering Run On Bear Stearns
With the rapid demise of Thornberg Mortgage, Peloton, Carlyle Capital and a host of smaller funds, as well as non stop UBS rumors, central bankers were seriously concerned.
They believed that massive liquidity intervention would calm markets and relieve stress.
On Friday, Mar 7, the Fed announced its liquidity plan and it was huge in two respects - the dollar amount and the extended maturity. As the St. Louis Fed put it "The Federal Reserve Board announces $50 billion TAF auctions on March 10 and March 24 and extends the TAF for at least 6 months. The Board also initiates a series of term repurchase transactions, expected to cumulate to $100 billion, conducted as 28-day term repurchase agreements with primary dealers."
Contrary to the Fed's hopes, however, the markets perceived desperation on the part of the Fed. Liquidity tightened rather than loosened. Investors and lenders suspected that the Fed anticipated another big domino to fall. That triggered speculation that Bear Stearns might be in trouble.
On the evening of March 10, the Federal Reserve held an emergency conference call to consider options for supporting the financial markets. The chilling transcript shows that William Dudley was very blunt on the call: "There were rumors today that Bear Stearns was having funding difficulties." Members actually discussed (but rejected) the unprecedented step of specifically excluding Bears Stearns, by name, from participation in a proposed securities lending facility. Ouch.
The following morning, Tuesday, Mar 11, the Fed announced a $200 billion term securities lending facility along with increases in reciprocal swap lines with the European Central Bank and the Swiss National Bank. The plan was to provide even more overwhelming support which would then calm the markets.
However, the markets were not fooled and heard just one message: "Bear Stearns is in real trouble and the central bankers are scared". The hemorrhaging of Bear Stearns began in earnest. Our next chapter deals with Bear's collapse.