On Thursday April 3^rd 2008, there was enlightening testimony before the United States Senate Banking Committee regarding the acquisition of Bear Stearns by JPMorgan with the assistance of the New York Federal Reserve (and potentially ultimately the U.S. Treasury and common taxpayers). The first panel was composed of Federal Reserve Ben Bernanke, SEC Chairman Christopher Cox, Federal Reserve Bank of New York President Timothy Geithner and Treasury Undersecretary Robert Steel. The second panel consisted of JPMorgan Chase CEO Jamie Diamond and Bear Stearns CEO Alan Schwartz. Toomre Capital Markets LLC ("TCM") thought that a couple of key items emerged from the testimony of these two panels:

• Bear Stearn's liquidity disappeared virtually overnight declining from $12 plus billion to about two billion on Thursday, March 13^th.

• Federal Reserve Bank of New York President Timothy Geithner is really impressive and clearly a heavy-weight. Toomre Capital Markets LLC previously highlighted his speech on the credit derivatives issue in the post Suggested Reading: Timothy F. Geithner Speech on Credit Derivatives. TCM is quite reassured that this regulator is at the helm of the Federal Reserve Bank of New York during this time of credit crisis.

• The various regulators were not prepared to deal with a liquidity crisis at one of the primary dealers (and it is not clear if they have the authority to do so going forward).

• At the invitation of the SEC, Federal Reserve examiners are now on site daily at the top five investment banks: Merrill Lynch, Goldman Sachs, Lehman Brothers, Morgan Stanley and Bear Stearns. While the Federal Reserve officials do not have the authority to direct the investment banks to follow its directives, one can be assured that the Federal Reserve holds one very critically key trump card: The Federal Reserve is not required to lend to any institution and critically is unlikely to do so to any institution that it deems as "unsafe". Hence, if the investment banks want access to the Federal Reserve discount window, one can be rest assured that they will be following the Federal Reserve's "suggestions."

• The collective regulators only had a first indication of liquidity troubles at Bear Stearns on the evening of Wednesday, March 12^th. They clearly were shocked at how quickly confidence could flow away from Bear Stearns and perhaps most importantly they never expected secured lending by the primary dealers to evaporate practically overnight.

• Bear Stearns currently accounts $25 billion of borrowings from the Federal Reserve Primary Dealer Facility. In the most recent week, the total amount outstanding was about $38 billion. Hence, the other primary dealers are not borrowing much from the Federal Reserve. This $25 billion in borrowings also are likely to disappear once the deal closes and the LLC is formed to fund the $30 billion in Bear Stearns assets that the Federal Reserve Bank of New York will be funding for up to ten years and which will be managed by BlackRock.

• The Federal Reserve and other participants are loathe to disclose exactly what is in the $30 billion portfolio other than they are investment grade securities and include many mortgage-backed securities, including many Collateralized Mortgage Obligation ("CMO") tranches. It will be quite interesting to see how the characteristics of this portfolio are reported on a quarterly basis going forward.