Can What Happened to Bear Happen to Other Banks?

The credit crunch has exposed vulnerabilities of investment banks that no one knew they had. Bear Stearns, we now know, was highly dependent on the kind of short-term loans called “repos,” or short-term repurchase agreements. And those repos led to the downfall of the firm.

Repos are loans that extend for only a few hours or days — which makes them one of the few kinds of debt that responds to market panics almost as quickly as stocks. When some of Bear’s counterparties panicked, they pulled all those repos nearly overnight, leaving Bear scrambling to find enough cash to cover the financing. And then…well, you saw what happened to Bear in the course of four days last week.

As David Gaffen over at the WSJ blog MarketBeat pointed out, about $3 trillion of the $4.5 trillion repo market consisted of extremely short-term deals such as overnight borrowing. The very short terms of repo agreements is what makes it possible for a firm to be left uncovered if sentiment changes quickly–or, literally, overnight, as happened in the case of Bear Stearns.

So, if you’re trying to gauge where the other investment banks stand — and how vulnerable they are to market rumors — it is important to understand repos as a percentage of assets: the higher the percentage of repos to assets, the more vulnerable a firm is to arbitrary changes in market sentiment or panicked pulling of credit lines.

Take a look below, then, at where some of the major investment banks stand–and how exposed they could be–if they were to become the subject of aggressive rumors, as Bear was. The data come courtesy of Sandler O’Neill Partners analyst Jeff Harte, who included it in a research report Monday.

From a Sandler O’Neill research note

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