Bear Stearns’s supply of repo funding – the lifeblood of any financial institution – was curtailed and the broker ran out of cash because of liquidity being withdrawn by institutions concerned about its exposure to both mortgages and hedge funds.
Brokers have illiquid balance sheets and depend on the markets’ perception of their creditworthiness in order to operate. So when margin calls led to the forced liquidation of credit fund Carlyle Capital, and forced sales at other credit hedge funds, market rumours of liquidity problems at Bear became widespread.
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