Saturday, March 15, 2008

Bear’s Run on the Bank

In the Depression a "Run on the Bank" occurred when shareholders literally ran to the bank to take their money out before they got stuck holding the bag.

Yesterday, the Fed and JP Morgan worked to prevent the modern equivalent. Because of the perception of financial instability, Bear Stearns was perceived to be a risky trading partner. Because of the perceived counterparty risk in dealing with Bear, trading partners vanished and its ability to earn money evaporated.

Although the Fed sponsored bailout will buy them some time, they are unlikely to survive on their own. Unless someone buys the bank, they are likely to go away soon.

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