Does Ben Bernanke know something the rest of us don’t? Here’s a little bit of today’s testimony:
On March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for Chapter 11 bankruptcy the next day unless alternative sources of funds became available.
Now as I understood things, one of the key reasons for the Fed to intervene was precisely that Bear Stearns could not file for Chapter 11, under which it could have continued as a going concern and worked things out over time. Instead (I thought) Bear Stearns would have had to file for Chapter 7 bankruptcy: an immediate liquidation, with all the chaos to markets that implies.
If Chapter 11 was really an option, then I have more sympathy for Bear Stearns shareholders than I did before: there’s a good chance, with a book value of over $80 a share, that they might have received something over $10 for their stock. In a Chapter 7 liquidation, by contrast, they would surely have been left with nothing. So, was Chapter 11 an option after all?
Update: The Deal had a story back on March 18 headined "Bear Stearns: Ch. 11 never an option". It’s possible that Bernanke, an economist and not a bankruptcy lawyer, simply got it wrong. But as Alea notes in the comments, even under Chapter 11 there would have been a lot of pretty disastrous liquidation going on.