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FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009

Which feature of the repo market most directly made Bear Stearns vulnerable in March 2008?

Bear Stearns relied heavily on short-term, often overnight, repo funding for less liquid assets. When confidence collapsed, lenders declined to roll the funding or raised haircuts, producing a run on its liquidity that forced its rescue sale in March 2008.

  1. AReliance on overnight secured funding that counterparties could stop rolling over or demand larger haircuts onCorrect
  2. BDependence on long-term fixed-rate deposits from retail customers
  3. CA large base of insured deposits that depositors withdrew
  4. DFunding largely through long-dated equity issuance

Explanation

Bear Stearns financed illiquid assets with short-term repo. When confidence fell, lenders refused to roll over or raised haircuts, causing a rapid liquidity run. It had no significant insured deposit base, and its funding was not long-term equity.

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