Chaffee, Marta

Lewis, Pat

Macalintal, Radley

Minnick, Phil

Stacconi, John

Upton, Robert

Yale University

Yale University EliScholar – A Digital Platform for Scholarly Publishing at Yale YPFS Documents Browse by Media Type 3-4-2007 SEC Memo Bear Stearns Liquidity Pool Inspection Robert Upton John Stacconi Pat Lewis Phil Minnick Marta Chaffee See next page for additional authors Follow this and additional works at: https://elischolar.library.yale.edu/ypfs-documents Recommended Citation Upton, Robert; Stacconi, John; Lewis, Pat; Minnick, Phil; Chaffee, Marta; and Macalintal, Radley, "SEC Memo Bear Stearns Liquidity Pool Inspection" (2007). YPFS Documents. 5736. https://elischolar.library.yale.edu/ypfs-documents/5736 This Document is brought to you for free and open access by the Browse by Media Type at EliScholar – A Digital Platform for Scholarly Publishing at Yale. It has been accepted for inclusion in YPFS Documents by an authorized administrator of EliScholar – A Digital Platform for Scholarly Publishing at Yale. For more information, please contact elischolar@yale.edu. Author/Creator Robert Upton, John Stacconi, Pat Lewis, Phil Minnick, Marta Chaffee, and Radley Macalintal This document is available at EliScholar – A Digital Platform for Scholarly Publishing at Yale: https://elischolar.library.yale.edu/ypfs-documents/5736 SEC_TM_FCIC_1053322Bear Stearns Liquidity Pool InspectionMarch 4, 2007Bear Steams: Bob Upton, TreasurerJohn StacconiPat LewisSEC: Phil MinnickMarta ChaffeeRadley MacalintalOverview ofthe liquidity poolThe liquidity pool is invested primarily invested in cash instruments, primarily moneyfunds. This is because BS can earn better rates through money funds than it can throughtime deposits. ill addition, BS can access overnight liquidity.BS holds liquidity pools at its three regulated entities (BS&Co, BSSC, and BSIL) anddoes not include these pools as a part ofthe parent company liquidity pool. BSSC haslots of trapped cash to handle settlements. Cash tra ed at re lated entities is notincluded in the liquidity pooJ. If a foreign su needs cash after the US is closed, the subcan go to Treasury staff in London or Hong Kong. The Treasury staff in London andHong Kong are not holding company employees, but instead are staff ofthe UK/HongKong broker-dealer. Foreign Treasury staff cannot access the US parent companyliquidity pool. ill instances where London is short of funding, London typically securesan unsecured overnight bank loan to cover the overnight shortage.On a daily basis, John Stacconi and Corporate Treasury decide what investment will beheld in the liquidity pool. If Corporate Treasury decides to invest in money funds, theCash and Liquidity Management (CALM) group processes the trade. When CorporateTreasury decides to buy or sell an asset in the liquidity pool, the funding desk writes aticket, which is then booked into the Electronic Treasury Management System (ETMS).The same process is used if the firm decides to invest in CP, CDs, bank deposits, or anyother type of investment.A rough draft ofthe liquidity pool investment guidelines were prepared last spring butwere not finalized due to the market conditions when the firm decided to go to all cash.A copy ofthe draft guidelines were obtained onsite. Some changes will be made to theinvestment guidelines before they are finalized. For example, the liquidity pool willlikely be restricted from investing in ABCP over a certain amount. ill addition, no moneyfund will be able to be invested in over 35% ABCP or 5% SNs. BS may also change theinvestment policy related to VRDNs.Overall, the processes relating to the liquidity pool's management is manually intensiveand prone to errors. For example, on or about January 29,2008, BSSC has a $3bnreceivable on it books from the parent company (i.e., BSSC thought the parent companyowed it $3bn). The parent company paid BSSC $3bn and the end result was parent1 NON-PUBLICCONFIDENTIALSEC_TM_FCIC_1053323company liquidity dropping below $5bn (parent company liquidity was $4.8bn), whichrequired notice to the SEC and other regulators. Bob Upton reported the issue to MattEichner, who be an monitoring the firm's arent com an liquidit dail oing forward.Ultimately, the BSSC issue was an internal accounting error where BSSC, in fact, owethe parent company $3bn. John Stacconi took responsibility for the error, and the firmcommitted to several steps to remediate the problem going forward. See Eichner3/30/2008 email regarding the same and the ongoing monitoring efforts. Stacconi statedhad the firm known the liquidity pool would have dropped below $5bn it would not havepaid the entire amount, but would have paid an amount that would have dropped theliquidity pool to $5bn.Funding room daily activitiesThe day starts at 7:00 am. The team reviews ETMS cash projection management (CPM)to see all projected inflows and outflows for the day. The system receives periodicupdates on the status of the maturing CP, investments, CDs, deposits, leveraged loancommitments, customer inflows, and outflows from the brokerage. BS also projectssecurities settlements for both the firm and customers. The system is currently BS's besttool to provide management a real time update on the status of the firm's liquidity needsfor the day.By 9:30 or 10:00, BS Treasury has an idea of daily settlements. If the firm thinks that itwill be short cash, it looks at ways to obtain funding.If the firm has excess cash at the end of the day, Treasury can either pay down borrowingor keep the cash. Treasury has decided to not pay down the secured funding and insteadholds the cash. BS's goal is to move as much cash as possible to the parent companXoutside of intercompanY restraints on regulated entities.-Bear Stearns maintains a $1.5 billion call account at Citibank for late day emergencies.Additionally, BS maintains roughly $3b~of secured funding lines with JP Morgan, Bank ".ofNew York and BNP Paribas and committed lines ofcredit with 15 to 20 banks thatamount to roughly $6 to $8 billion. The firm also noted that these unsecured lines aregenerally available but in a downward market or event, the entire amount ofthe linesprobably won't be available; it would be some amount less. Secured and unsecured linesare not counted as parent company liquidity.End of the Day Procedures'/~~At the end ofthe day, the firm will likely either be long or short cash. In the even that the 'J''''~~firm is long cash, Treasury will move that money, to the extent possible, to the parent ~~company. The firm prepares an end of the day analysis (or symmaOl) ofparent companx ,/liquidity, which report is being provided to Matt Eichner as a result of the liquidity pooldropprng below $5bn in January 2008 (see discussion above under Overview ofliquiditypool). Several factors play into whether Treasury can keep the cash at the parentcompany.2 NON-PUBLICCONFIDENTIALSEC_TM_FCIC_1053324First, the firm looks at which entity has the cash. If the cash was generated at a regulatedentity, the intercompany payable determines how much money can be moved to theparent. For regulatory purposes, a regulated subsidiary cannot owe money to the parentcompany.If cash was generated through CP issuance or other debt/note issuance by Treasury, thenthe parent company simply keeps the cash.If the firm is short cash at the end of the day, Treasury has several options. The firm canborrow on a secured basis. In addition, the firm can tap unsecured lines, such as fromCitibank. Currently, BS has committed lines ofcredit of $6 to $8 billion in unsecuredlines available to the holding company (these are not considered part ofthe liquiditypool). Use of the cash in the liquidity pool is seen as a last resort.-MIS Systems'7 (@roVides information on BS's opening and closing positions, but does not bave• lme information. BS's cashier is constantly working to balance the bank drawsagainst CPM (Cash Payment Manager), which ties to the bank statements at the end ofthe day. Firm noted that ETMS was recently audited by ig,temal audit and the staffrequested copies ofthe audit. The staffdid not receive the audits due to Bear Steam'scollapse.CPM shows high level details that the firm can drill down into the details from the systemto specific customer account level details. CPM is used globally and ties to 15c3-3movements.ProjectionsIn general, BS tries to put all securities held by subs out on repo in order to fund thebusiness. If a business unit cannot fund a position, they will come to the parent company.According to John Stacconi, for example, there is a one-day lag between when desks buya security and when those desks are able to repo the security. Bear Steams is developinga system to better project cash needs in the future, with the goal ofbeing able to predictthe next day's draws with a high degree of accuracy. It is anticipated that the newsystems will be able to identify collateral that is located in the box so that the firm could[mance the posi~ion. In ""ddition, Bear Steams would like to be able to predict cash drawsfor a few days out, with the understanding that this information will not be as accurate asthe predicted draws one day out.In order to have a more sophisticated liquidity management system, the firm must be ableto do same day cash projections and same day secured funding of assets. Once that ispossible through BS's systems, the firm will create separate a liquidity pool and operatingcash.3 NON-PUBLICCONFIDENTIALSEC_TM_FCIC_1053325The projected daily cash draw changes through out the day.Any difference between the daily projection and the cash balance in CPM at the end ofthe day is made up through bank loans. As a last resort, the company could sell itsmoney fund investments or accessing the money through customer funds.To help manage cash needs, the:firm uses a daily corporate funding report, which showsshort term funding needs. In addition, the :firm is creating a calendar ofmaturities toshow maturing debt and paper on a daily basis.Additionally, Treasury is working with the firm's Global Finance Committee (which hasbeen in place 12 to 16 months) to open up better lines ofcommunication regardingfinancing needs. Also, t!!.e firm's Finance group reconciles liquidity pool activity to thefirm's books and records.Key ControlsThe key report that the firm reviews on a daily basis is the daily corporate funding report,which is reviewed by Joe Furlong in corporate treasury and then is sent to John Stacconi,Pat Lewis, and Bob Upton. In addition, George Ilario (business unit control) receives andreviews the report.The Corporate Funding Report is produced daily, which provides a daily profile of theliguidity PQol. In addition, this report contains information on short term (under oneyear) secured and unsecured funding. The staffobtained a copy of the 3/8/2008Corporate Funding Report.BS has established a daily process for monitoring liquidity. On a daily basis, GeorgeIlario reviews the Corporate Funding Report and ties this information to the books andrecords.The Global Finance Committee looks regularly at the liquidity pool and reports on the:firm's unsecured and secured funding.There are no Treasury supervisory polices and procedures, and the firm personnelgenerally rely on the corporate funding report, ETMS, and the end ofthe day report tomanage liquidity held by: the parent.Meeting with George IlarioMr. Ilario is the business unit controller. He described the reconciliation process to thefirm's books and records.The majority of the reconciliation happens at month end. Any breaks in the liquidity poolare resolved in two to four days after the end of the month. Mr. Ilario's month-end4 NON-PUBLICCONFIDENTIALSEC_TM_FCIC_1053326process reconciles both the balance sheet and profit an4 loss aspects of the liquidity pool.For the most part, Mr. Dario's has noted that nominal differences are identified in theestimated interest income and the amount of interest income calculated by the moneyfund investments. The controller's staff investigates any differences between earnedinterest and recorded interest. Any differences are captured in the global suspenseaccounts. Month end reports contain everyday balances and interest rates. Mr. llario'sgroup compares the schedule of interest booked to the general ledger. If there are anydifferences, the team will go back every day and compare the balances to identify thebreak. On average, the balances reported in the general ledger should be the same as thecorporate schedule. -e-For the reconciliation ofthe principal amounts, the controller's office conducts a dailyreconciliation between the daily corporate funding report from ETMS and a generalledger report for the holding company cash accounts. These two reports are comparedfor major discrepancies but are not tied exactly.According to Mr. Hario, it is possible for there to be breaks in the principle amounts iftransactions are booked in the wrong account or if transactions are booked late. Thesedifferences would appear in the daily review ofthe general ledger and the daily corporatefunding report. All of these errors are resolved by Mr. Hario'steam.In order to close the books at month end, the controller's team has a four-day window toidentify the appropriate P&L accounts. The firm closes the general ledger sooner thanthe P&L, which will remain open during the four-day window.5 NON-PUBLICCONFIDENTIAL

SEC Memo Bear Stearns Liquidity Pool Inspection

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SEC Memo Bear Stearns Liquidity Pool Inspection

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