Two Years A.B.S. (after Bear Stearns, not "asset backed security") and a question:
Did Bear Stearns have a liquidity crisis before
CEO Alan Schwartz finally copped to it on
Thursday, March 13, 2008?
Wall Street Law Blog fearlessly weighs in...
Let's start with a few definitions...
The term LIQUIDITY means cash and cash equivalents. "Cash equivalents" are highly liquid assets (assets that can easily be sold) like Treasury bonds.
ILLIQUID ASSETS are items that have little or no market demand and, therefore, cannot be easily turned into cash.
A LIQUIDITY CRISIS occurs when there is a threat to a company's ability to access enough cash to meet its financial obligations as they come due.
And add a little bit of perspective...
When a CEO (like Alan Schwartz) tells the public there is no pressure on his company's liquidity, let alone a liquidity crisis (as he did on March 11 and March 12), we take that to mean that the company has no current OR reasonably foreseeable problems that might make it hard for the company to access enough cash to meet its financial obligations.
It is not possible for a large company with "no pressure" on its liquidity on one morning to be so cash poor by the close of business the very next day that it needs billions of dollars in emergency financing from the federal government to avoid bankruptcy. And yet, that is precisely what happened to Bear Stearns.
By a show of hands the crew at Wall Street Law Blog voted on the question of whether Bear Stearns had a liquidity crisis on or before the Alan Schwartz's vehement denials on March 12, 2008. There was no need to tally the number of outstretched arms. We all said Schwartz was wrong when he denied liquidity problems two years ago. Predictably (I know these folks pretty well), no one changed his or her mind.