Slaying of the Big Bad Bear - Mini Analysis - Part III of III

This is Part III of III of my mini-analysis and a continuation from Part II. Click here for Part II

For Bank A to make money in this cash from Bank C is vital. Why? Because without this, it can’t buy the second set of Treasury Bonds that it wants to short. Hence bye bye any chances of making money. More importantly it has to return the original $100 it borrowed from Bank B. The damage is two fold. So it has to use it’s own cash reserves to pay off Bank B.

Now, Imagine this scenario with Billions of dollars and multiple banks involved. Bear Stearns basically had to dip into it’s own reserves to pay off many many many Bank Bs and in the process lost all it’s cash reserves. This would have been ok if the securities it had in it’s position were valuable, ‘cause that way they can sell them off to raise cash. Unfortunately these securities (many of them mortgage backed ones) were useless as no on wanted to buy them. So they were basically screwed!

Post comments if you did not follow this. I would be glad to discuss.

Also, I will post later about the whole Bear Stearns saga once I understand it.

That’s how the cash crunch at Bear Stearns came about (atleast that’s the way I understand it!).