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Case 1:08-md-01963-RWS Document 552-3 Filed 03/18/16 Page 1 of 140
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INVESTMENT MANAGER INFORMATION
CONTACT
INFO RMA11ON
name
company
Bear Steams
Address
Asset
Telephone
New York NY
14004364148
Fax
917-849-1418
Title
of
of
Heather
contacts
10179
ge
of
Fund
Product Specialists
212272-3226
contacts
of
Malloy
Mak
Ken
contacts
Telephone
mail
Inc
bsamhedgefundproductmanagementbear.com
E-mail
Name
Management
Madison Avenue
383
212
2724375
[email protected]
contacts
[email protected]
www.bsamonline.com
Internet/website
www.bearsteams.com
COMPANY
In
1985
Steams
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plans
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domestic
balanced
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accounts
total
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billion
of assets
Fund Managers
2004
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HALE to DORR tIP
CONFIDENTIAL
BEAR
01568642
by the company
of client
across
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stock
ORGANISATION
how many
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full-time
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background
short
career
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principals
As
there
are
of
Please
of
31 2006
March
employees
Ofthis
refer
the
to
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number
Steams
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for
12000
approximately
work MI-time
331
full-time
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within
our principals
biographies on
background
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Please
information
attach
if
necessary
BSAM
how many
investment
manaters analysts
professionals
etc
in
portfolio
company
the
total
30
investment
experience
enclose
the names
of
an
years
both
years
as
years
the
in
managers
depicting
charge
in
of
investment
and private equity
and
fixed
of professional
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this
Comprising
analysts
includes
portfolio
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document
the attached
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professionals
research
traders
and
52
other
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hedge
professionals
ppatejyyears
Please
43
which
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equity
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chart
organisation
senior
Our
of professional
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in
125
managers
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employs
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average
have
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pertaining
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the
firm
20
for
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areas and headcount
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Reporting
Research
performance
and
analysis
development
IT/Programming
Administration
Risk
Management
comptiance
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and business
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please specify
What has been the turnover
companys
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Where
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Not applicable
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are
Yes
occasionally
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research
conducted
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Accounts
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Stearns
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portfolio
take
of
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utilize
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New York City
New York City
in
marketers
to
assist
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raising
assets
details
Yes
or any other
the
firm
is
member
of
AlMA
association
Iltustrative
Alternative
Questionnaire
investment
for
Due
Manggement
Confidential
Diligence
Asgociation
Treatment
Requested
Review
Limited
of
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AlMA
Fund Managers
2004
of
22
by
HALE AND DORR
ONFIDENTIAL
BEAR
01568643
MANAGER REFERENCES
Please provide
and
company
involved
In
two
at least
each
for
of
references
the
management
the
for
the
principals
of
the
Not
fund
applicable
Name
Profession
Company
Title
Telephone
Fax
E-mail
Current and past
company
the
FUND
or
with
relationship
its
principal
DETAILS
Contact
details
Name
Heather
Address
383
Telephone
212272-3226
Malloy
New York NY
Madison Avenue
10179
Fax
E-mail
[email protected]
Internet
www.hearstearns.com
Fund
structgre
Legal
entity
Bear Steams
Delaware
Domicile
2003
assets
inception
of
the
fund
decisions
and explain
details
If
any
so
please
requirements
2003
behalf
of
Both
versions of
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Credit
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substantially
Structured
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7004
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01568644
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involved
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HAEmpDORR
ONFIDENTIAL
BEAR
01568645
Matthew Tannin
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to
time
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of fixed
his
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the
1993-1995
in
income
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career
Street
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302
791-1331
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353-1-790-6012
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professional
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Review
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has had
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AlMA
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Fund Managers
2004
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22
by
HALEAI4D DORR ia
ONFIDENTIAL
BEAR
01568646
FUND PRICING
Who
and
for
responsible
is
how
are any
obtaining
Not
valuations
assets
difficult-to-price
applicable
or
instruments priced
PRIME BROKER
Details
Paul
Fanelli
Name
Bear
Steams
Address
One MetroTech
Telephone
Brooklyn
Fax
212272-1000
Securities Coçporation
NY
Center
11201
E-mail
Duration
of your professional
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If
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CUSTODIAN
Details
Paul
Fanelli
Name
Bear Steams
Address
One MeiroTech
Securities
Telephone
Brooklyn
NY
Fax
212272
1000
Coppration
Center
11201
E-mail
Durati1 of the conipanys
relationship with the
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AUDITOR
LLP
Touche
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1700
Philadelphia
Address
Ann
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PA
Mundy
299-4558
Offshore
Capital Place
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Floor
19103-3984
tmundydeloitte.com
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1787
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Hedge
AlMA
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2004
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01568647
Duration
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787
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New York New York
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FUND ASSETS
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list
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size
percentage
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the
size
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by investment
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of
March
31 2006
represents about
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Master
Funds
assets
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billion
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largest
Please
the funds
of
of
management
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over
changes
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CAPACITY
MANAGEMENT
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The Altemative
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Management
Diligence Review of
Limited
Association
Hedge
AlMA
Fund Managers
2004
11
Confidential
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of
22
Treatment
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CUTLER PICKERING
HALE
ONFIDENTJAL
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DORR2P
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01568648
WITHDRAWALS
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CUTLER
HALE
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No
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AlternativtnvyanerftAfapajt
WLMER
CONFIDENTIAL
or
Diligence
Association
Review
Limited
of
Hedge
AlMA
Fund Managers
2004
12
of
22
by
PICKERING
DURR
BEAR
01568649
MANAGER TRACK RECORD
The
Number
managed by the
of portfolios/accounts
company
Structured Credit
Structured Credit
Fund
Opportunities
Steams
Bear
of
funds
managed/advised
by the
Emerging
Bear Stearns
Healthcare
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Large
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Cap
Value
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oldest
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3-Year
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Diligence
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Limited
Treatment
Requested
of
Hedge Fund Managers
AlMA
2004
13
of 22
by
HALEAND DORR LI
CONFIDENTIAL
BEAR
01568650
Adrninlstrativc
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Characterise
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Limtted
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AlMA
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2004
14
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PICKERING
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Limited
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7004
15
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1-EALE AND DORR tIP
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Limited
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AlMA
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7004
17
Confidential
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Treatment
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by
HALE AND DORR LIP
ONFIDENTIAL
BEAR
01568654
INVESTMENT RESEARCH
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Due
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Requested
Review
Umited
of
AlMA
Hedge
Fund Managers
2004
18
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by
HALEPIND DORR LIP
ONFIDENTIAL
BEAR
01568655
EXECUTION
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Describe
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From
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May 31 2007 950
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Message
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Sent Thursday
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383 Madison Ave
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ADAM KUGLER
From
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ADAM KUGLER
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CON FIDENTIAL
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EXHIBIT
UNITED
STATES
AND EXCHANGE
SECURITIES
WASHINGTON
COMM1SSION
D.C 20549
December
OFFICt OF COMPLIANCE
INSPSCTIONS
AND
2005
EXAMINATIONS
Mr
Farber
Jeffrey
Senior Managing Director
Co
Bear Steams
Inc
383 Madison Avenue
NY
New York
Mr
Dear
of the
10179
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An
U.S
examination of Bear
This examination was conducted
Appendix
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be regulated
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Steams
and Exchange Commission hereinafter
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15c3-1
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to the
informal management
by an independent
perform that review
Low
lAD In
TADs
with useful information about potential problems with confirmations
Concern
reviewed
that
regarding whether
management
2005 hours
cycle
responding
perform functions
to
lAD
of centralizing the receipt distribution and administration
by lAD personnel
CO
of
CG
counterparties and confirming balances
subject
10%
firm stated that only about
2005 Audit Plan
its
does so primarilyfor
group within lAD performs an operations
and has not been subject to review by lAD personneL CG
function
related
it
of
15c3-4
2004 Audit Plan
the
complete
some audits
remains concerned regarding
the integral services
of non-trade
lAD may not
defers
it
an apparent
that
Exchange Act Rule
to
pursuant
should
of periodic reviews
statements concerning
although
five-year audit
its
The Confirmations Group
or compliance
concem
has
timely
in
schedules
audit
timely performance
as required
Plans
or late 2004 audits
staff
items within
the staff
predict that
the
Audit
its
Although meeting
TADs
accepted the staff
premature
is
it
be completing
not
expense of thoroughness
the
at
of personnel
TAD may
audit cycle
five-year
to the
audits
at
firm
the
at
may pose
low risk findings
record of low risk findings to assess there relevance
by
System
time of the audit
later
larger risk to the
Therefore
in the
it
date
the
firm
firm should
aggregate
BEAR
01409441
lADs
staff
is
procedures do not contain
concerned
audit
prevent
that the lack
of
formal continuing
written
from receiving
personnel
the
on
takes
This will
Firm
that
lAD agreed
Response
but stated that
is
it
into
looking
lADs
personnel
its
increasingly
and especially
if
lAD
may
to
important as
continues
to
The
Firms Response
staff
concerned that such procedures
is
lAD
report drafting
is
The staffs review of
inconsistencies
to include
Response
audit
thirteen
In
has
flIes
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addition
The
for
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is
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to the
to reflect the role
preparation
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documents
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to
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of
process
in
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that the
report
senior
of the Audit Report
number
of procedural
that
contained
lAD
on
quality
its
lADs
incorrect
procedures
dates
and failed
assurance program
to
ensure
procedures
will
the staff
and requests that the firm advise
be prevented
that
in
lAD
the
that
JAB
does not provide
to
It
provides nor
the Audit Committee detailed
progress on the Audit Plan
supplemental
Audit Committee that could
the
provides to the Audit Committee analysis
provides
lADs
how
fiiture
Audit Committee with every Audit Report
TAD
the
concerned that the quality assurance program did not cover
by
written information on the status of
concerned
in
auditors include
audit findings to supplement the Audit Reports that
did the staff find evidence
provides
the
files
certain
that
did not find evidence
of aggregated
in
the
before
permit business
supervisory review
lAD responded
the
to
determination on findings
were missing documents
are maintained according
Staffs Concern
procedural
business
of the
that
procedures
revise the
evidencing
signatures
that allfiles
findings
of the business
appear
team to make
confirming facts
to
will
it
Several
require to be retained
lAD
also stated
requirement
senior managements input
asserted that the
of the audited
management
audit
independent
limited
The firm also stated that
The
more formal continuing education
requirement
lAD
continuing education
the drafting of the Audit Report and to require that
in
rather than the
persormel
files
no formal continuing education
of the Audit Report be obtained from auditee senior management
issuance
Firm
is
receive sign jficant
procedures appear to permit senior management
approval
audit
that there
do
instituting
have undue influence
CONFIDENTIAL
become
requirement
more junior employees
hire
its
SOX
responsibilities under
additional
The
requirement
needed to continue
education
continuing
perform their audit related duties effectively
lAD
education
formal continuing education
that
analytical
highlight
potential
it
Although
issues the staff
information
is
on audit
themes or areas of risk
BEAR
01409442
Firm
lAD
Response
reporting
does
it
Staffs Concern
in
asserted
The
regarding the information
MARKET
The
The
RISK
staff
reviewed
staff
focused
such
staff believes
that
the
its
The firm has
review
on
the internal
The
set
The
procedures
limit
to ensure
firm does not maintain an
for
Board
to
and scenario
is
analysis
market
Its
limited policies
addressing
and
risk
other
all
more
provide
level
and complete
downstream
sub-allocated
VaR
overall
approved
new
of the risk
specificity
firmwide Value-at-Risk
risk
management
procedures are adequate
Committee
or
testing
reporting
that the
overall
aggregate businesses which
its
back
but no procedures for
exceptions
utilized
and
surrounding the development
firm has established
breaches
limit
procedures and practices
controls
and reporting of risk throughout the finn the mark
management
of general policies
Bear Stearns does not have
limit
Audit Committee
controls
These policies should be enhanced
management
such
should maintain written documentation
firms market risk management
management functions
controls
that the firm
require
Audit Committee
its
MANAGEMENT
process market risk limit
trading limits
lAD Guide does not
the
information to
presented to the
is
review of models the management
review
although
that
provide
fact
to
limit
VaR
firmwide
individual
its
business lines
Firm
Response
VaR
limit
up
is
To date Bear Stearns has not made
which emphasizes knowledge
an approach
it
Well justified risk-taking will
the
approved
Bear Stearns doesn
and
thus
same position
on
it
to
result
factors
tend
the
doesn
often
When
risk
level
of interest
firm believes that
Firmwide VaR
sufficient
magnitude
However
the
have aflrmwide
Bottom
to setting limits
of the details
The firm then
and
of the risk
evaluates
the
scrutiny
of
sum-total of
is
evaluated first and foremost at the trading desk level
is
take
find
it
big positions
itself
with
in
VaR
the risk factors
spikes driven
measure does not tend
Desk-level
exposures
its
risk profile tends
spike there
to
the
to
would
not
compel the firm
be
dtfficult
to
is
less
across all
having
need
moderate
kept to
be dominated by
to
common
to
the
set
limit
most ubiquitous risk factors
measured daily and disseminated
to
most
by everyone
to
rates have typically been
or volatility
The firm indicated that
CONFIDENTIAL
to
constrain the spikes
e.g general
be approved
to
priority
it
approach
risks for overall acceptability
At Bear Stearns risk taking
desks
bottom-up
The firm generally takes
place
As
leveL
diversity
of risk
but has not exhibited
limit
upon
it
implement afirmwide VaR limit
firm does not believe that the previous lack of
this
limit
is
indicative
of any
BEAR
01409443
weakness
internal
in its
would add
Staffs Concern
limit
Bear Stearns
established
management
controls
to
this letter
in
new trading
establish
Risk management
has been
after the limit
more
detail
why
and approve
from
limits
control
Firms Response
Management
is
The
limits
trading
copy of the limit
receives
established
in establishing
Management
VaR
internal risk
its
this
not
is
staff believes
and limit
risk
memorandum
approval
Risk Management
that requiring
breaches will
limit
existing
with their sole written approval without direct approval
management
approval
response
firmwide
whether implementing
firms particular business model
Certain business heads can
breaches
in
limit
environment
should consider
explain
or
of such
feel that the introduction
it
to Us control
Board or Committee level would enhance
at
for the
appropriate
nor does
controls
meaningful way
in
strengthen
the
Risk
function
With
regard
currently
to
appro val process the firm noted that Risk
the limit
signatory
new
to
policy so that new limits are not officially
limit
approvals but they will
approved
modify their
signed-off upon by Risk
until
Management
The firms stress
testing results are
not the subject of periodic formal discussions
of risk committees or other management discussion
for
of historical and hypothetical
variety
management
However
are
not included
Firm
stress
in
Response
test
the
Since
in
The
The
in
staff
management
test
fieldwork
consider
produced
daily
Max
Recovery
into the
EMC
and
completion
EMC
now added
is
to
the
finn
various
risk
whole
calculation
review
integrity
management
to
only
ensure
review of
loan feed into
Management
The reviews
Since the staff conducted
staffs data
Max
response regarding the status of including
and the incorporation of the stress testing
results
into
framework
and systems
comprehensive
EMC
scenarios
the firms Market Risk
conducted
reports
below
The
is
distributed to senior
not formally incorporated
Also two business areas
staff also requests
the stress
Differences
noted
are
is
scenarios
the staffs
staff
CONFIDENTIAL
stress testing
Stress testing
scenarios which
scenarios
Staffs Concern
Recovery
the stress testing results
framework
stress
reports were identified by the
reviews
identified
and
limited testing
the
BMC
accuracy
tests
certain
of
the firm
its
engine did not properly include
unsettled
may
which
are
wish to
reports
Core Loan Groups
Risk Information Organized
of the daily risk
differences
loans
RIO
revealed
the
firms
that the
VaR
positions
BEAR
01409444
Firm
The
Response
st aft
new feed
was informed that
is
be completed
to
shortly
ii
The
staff
new
concerned that
is
mortgage
mortgage derivative
by RIO
firms
the
This timing delay was due
model
2005 was
engine until approximately July 18 2005
desk trader was
the fact that the
to
aforementioned
for the
of three
sample review
one trade with trade date July
that
VaR
has the ability to prevent
trader
For example
trades revealed
derivative
not processed
pricing
RIO
from flowing into
trades
trade
still
programming
Unix database
in the
trade entry
system
For residential and commercial
iii
VaR
included
The
iv
were due
differences
Further the staffs review
through August
obtained
which
of
31 2005
had exceeded
revealed
their
the
that certain
The review
also
revealed
various
for
dirty
PNL
Basel guidance
by risk management
guidance
clean
According
data
that the firm
validation
read by
RIO
The
noted the firms failure to update on
See
files
within
the
of corporate/credit
internal practice
without
in
limit
PL
development
to utilize
clean
should consider
for
PL
issuers
notification
had not
many
trading
areas
when performing
implementing the Basel
requires
updated
Supervisory
Approach
to
and Structured
VaR
its
spreads
weekly
Framework
of
team
daily
to
the update of
sought to review
VaR
The
into the
timely basis two of the six
had gaps
inputs
for
which
January
result the
in
Conjunction
RIO system
files
the
the
used for
firms
firms daily
with
the
staff
of several weeks and up to
Backtesting
Requirements
related
staff
are inputs
information As
for the use
Capital
which
in that the data
update
spread/sensitivity
Market Risk
The
process
Unix Database
Transactions
models upon release however
purposes of calculating
for
six data
the
still
periodic model review
and
that are
for
process
reviewed
staff
CDS
andlor Default to
programming and coding
its
controls and written procedures
to establish
data inputs
sensitivities
ONFIDENTIAL
is
most appropriate
staff believes
one-time
inputs
PL
the firm the Financial Analytics
to
the firm needs
VaR
is
it
The firm has completed
or clean
static
that
states
approvals
that certain
the daily
in
2005
were not
soon as practicable
as
conducts
an
same period
businesses
while
The
backtesting
reports
Report
utilized
period July
Value limits
At the time of our review the firms backtesting of
incorporated
VaR
management
risk
issuer limit
Limits Market
Spread
were not reported
during
reports
Mortgage
VaR Report for that day
CDS limit reporting for the
timely manner
in
Zero limits
the fact that
to
management
than those in the Firmwide
are different
of the Firmwide
version
earlier
which
figures
risk
mortgages the Mortgages
month
VaR
Internal
Models
1996
BEAR
01409445
amounts
could
recommends
be based
Exchange Act Rule
Firm
will
stale
data
at
time
in
any point
the staff
Additionally
model review process as required by
periodic
15c3-led1ii
maintenance manual for
The firm will inplernent
Response
which
on
firm establish
that the
program of review and updates of key
identify
RIO models
its
RIO
system
and
assumptions
inputs
The firm should enhance
i.e
specificity
reviewing pricing model
one
EMC
performing
model
performing
2005
The
validation
staff
The
in the
is
noted below
model
validation
The
the
team has completed
EMC
process of validating the
staff
non-
from early 2004 to early
reports
concerned
is
more
provide
team has focused on
validation
Additionally
model review
ten
policies to
model
pricing
derivatives
and
reviewed
staffs findings are
in the pricing
specificity
for
model review
The
model validation
pricing
its
written procedures
that the lack
policies can result in inconsistent
of
actions
being
taken by the firm
The
staff
Mark-to-Market
noted that
valuation of mortgage
ii
derivatives
Review
Valuation
cited
concerns
how
were made in this review
advanced
action
the
pricing
model approach be implemented
programmed/modeled
Price verification
responsibilities
to
require trader
price
procedures
staff
level
verification
verification
For the products
is
to
noted
an aging
its
to
inventory report
is
disseminated
to various
policies
on
be enhanced to
reviews
and Business
The
based
upon
Unit Controller
staff believes
of those
and procedures regarding aging of
the firm currently
CDS
mortgage
loans in that
timely basis
ages inventory for
Bear Steams policies and
encompass each business aged
not the primary reviewer
managers
level
review of the
to
process
with residential
Management
need
and clarify the accountability
reviewed by the stafL
be enhanced
concerned
be enhanced
or portfolio
and commercial mortgages as well as
need
to
should be documented
needed to document
firm needs to enhance
residential
the staff
For the three aforementioned
revealed that existing policies
Additionally Risk Management
are
for the price
inventory
ONFIDENTIAL
regarding
such enhancements
receive
and procedures need
process
controls
procedural
predetermined thresholds
10 The
more
that
for release
policies
firms price verification
responsible
however
no
models they are either pending release or are yet to be
pricing
include
models
recommended
delays in the implementation of the pricing models
The
work however
on
recommendations
for corrective
on the
models created
decade ago and limited documentation
Three of the ten pricing model reports reviewed
that
report issued
with outdated
inventory procedures
Risk Management
Moreover
Mortgage
of this report but rather the report
for their
review
For example
the staff
does not
Risk
is
noted that on
BEAR
01409446
August
for the
that
23 2005
period ending
was about
11
received
Risk Management
Mortgage
May 31 2005
result
as
Risk
EMC
copy of an
Aged Report
document
reviewed
Management
weeks aged
OPERATIONAL TESTING
The
staff
conducted
and fixed income
transactions
derivatives
addition
In
of the firms systems and procedures
review
along with evaluations
transactions
the
of the firms
BCP
credit
processing
well as residential and commercial mortgage
as
reviewed
staff
for
the
firms business continuity
BCP
plan
testing
Residential and Commercial Mortgages
Reconciliation
MORT
manner As
aged
may
office
breaks
COTS
i.e
It
once
or
however
once
the
loans
have
been
sold
Response
The firm has indicated
items over 100 days had dropped
is
to
that
items
adjusted
break between
position thereby causing
MORT
between
require
will
timely
23448%
actual
were
and
there
cash
research by operations
to reflect that there
as of November
and resources
83
in
been sold or securitized
difference
These
MORT
have
loans
represents
paid and the amount anticipated
received
longer
that
I.e
front office
be corrected
to
of 492 breaks of which
total
that
appears
small position remaining
EMC
between the
do not appear
of July 15 2005 there was
than 100 days
greater
be
Firm
differences or
and back
is
GOTS
the
continue
no
number of aged
be deployed
to
to
streamline the process
The firm should enhance
and/or develop
formalized policies and procedures
regarding Middle Office and Operations controls
Formal policy and procedure
of mortgage
operational
should utilize
ARMs
HYDRA
reconcile
and Loss
Profit
independent
which contains
of the traders
desk do not utilize
Controllers
ONFIDENTIAL
for calculating
often
the
HYDRA
make adjustments
traders
PL
to
the
PL
PL modules
PL
the
back-office
for
in
PL
the
the
in the
firms
ARMs
that the
that describe
utilized
desk
ARMs
is
desk
order to provide
source
majority of the traders on the
they utilize their
Management
systems
and clarify
staff believes
own input The
for
in
The
andlor developed
between
order to document
with other mortgage desks
inconsistent
PL
in
controls
The process
of
transactions
processing transactions
in
be enhanced
flow and the reconciliations conducted
the transaction
processing
manuals should
own
spreadsheets
Reporting System
MRS
to
BEAR
01409447
Firm
to
The
to
The staff was informed that the
Response
HYDRA
firm failed
to
maintain
documentation
sheet
desk will begin switching over
evidencing
releasing term sheets for commercial loans
signatures
ARMs
mid-October 2005
in
Large Loan Authorization form
on
are required
on fixed rate loans greater than $40 million and on
loans
The
firm failed
included in the staffs
Firm
Response
maintain
to
required approvals
sample
authorization
this
of which
all
Going forward
prior
greater than $40 million Approval
term
prior to releasing
securitized floating
all
rate
form for any of the five loans
were greater than $40 million
evidence
be documented
of such approval will
and
maintained
Credit
and FLted Income Derivatives
The firm should enhance and/or
formalized policies and procedures
develop
regarding Middle Office and Operations controls in processing transactions
Formal policy and procedure
of derivative
processing
transactions
of the firms operational
indicate
trades
In
Amendments
by the
When
blotter
not
processing
Firm
therefore
and clarify
the accountability
conduct
to
verbal
which
should
confirmation
verbal
for
also
all
confirmations are
are not reflected on the trade blotter which
Although
reflected
to
trade
to
on the firms books and records
misunderstand
this
true risk position
its
occurs the trade ticket
creating discrepancies
is
are amended in the
these transactions
the front-office
change or amendment
is
required
transactions
front-office
could cause
discrepancy
document
that describe
systems utilized in the
Middle Office policies and procedures
systems and accurately
operational
order to
and/or developed
between
should be defined
CDS
to
is
in
conducted
addition the time frame within
required to be obtained
utilized
controls
Middle Office
that the
derivatives
manuals should be enhanced
flow and the reconciliations
the transaction
is
changed
but the trade
between the blotter and the trade
systems
Response
The front
Processing
office to
STP
current process
resolutions
This issue
is
was corrected subsequent
middle office
fixed
manually intensive
the staffs
transactions
evidence
review
of non-Straight-Through-
reconciliation
income derivative
to
should be enhanced
of reconciliation
are not maintained and the identity of the individual
reconciliation
is
not required
non-STP
trades are
systems
At
the
In addition
to
conducting
being input into the Tiger
manually input into the Summit
The
breaks and
the
trade blotter
Exotica Risk and Valuation
end of the day the Middle Office manually compares
the
Tiger
trade
10
CONFIDENTIAL
BEAR
01409448
blotter to the
is
New
Trades Report which
no documentation
or signoff
FIB
sales
trades were
the accuracy
for
salesperson
and reviewed
review
which
raises
by
by the trader instead of the
directly
This practice decreases
of the trade
details
the salespersons
being input into the firms
marketer trades be input by the
that internal
requires
the trader
exclusion of the salespersons
The finn
Response
limitations
to
the
and the Middle Office
However
four out
will
enhance
its
policies
individual
follow-up
first
should include
attempt
attempts should be made with counterparties
The
confirmations
surrounding unsigned
practices
weaken
noted inconsistent
staff
The
confirmations
of
the effectiveness
this
and procedures
to
reflect
its
salespeople
Handbook
Documentation
time frame within which the
of 11
The
weakens the firms existing controls
input
trading system for
The Derivatives
There
concerns
marketer trades reviewed by the staff were input directly by the trader.2
internal
Firm
input
The FID group
processing systems
manual
this
by internal policy
salesperson as required
accountability
evidencing
Exotica systems
of the review
regarding the accountability
Several
fed from the Summit
is
is
the
guidelines defining
well as subsequent follow-up
that have outstanding
practices
staff
as
unsigned
with regard to the process
concerned that these inconsistent
control
Business Continuity Planning
Bear Stearns does not
test
the
ability
of the Sterling
Forest facility
to
function
an emergency backup to its primary data center The firm contends that it
two data centers at Whippany and that each one is
The
backup for the other
Forest
site is
site
primary backup
and
vice
building
secondary backup
treated as
The
staff believes
specific
event
two Whippany
facilities
primary backup site
When
the
primary data
The
four
trades
small scale disruption
site
the testing
Sterling
of
expected
can backup
Whippany
such as an IT intrusion or
facilities
being affected
by
proximity and share infrastructure and personnel
are affected
As such
Boulder
center
in
to
while Whippany
firm runs the risk of both
the
event in that they are close
site
of
versa in the event
that
not subject
in
the firm
single
should
event
as
operates
Sterling
the
same
the
If
Forest would be the
have tested Sterling Forest as the backup
becomes active Bear Steams should
test
that
site
as
its
backup
input
by
the trader
were
associated
with one salesperson
11
CONFIDENTIAL
BEAR
01409449
LEGAL AND COMPLIANCE
The
reviewed
staff
the
firms overall
including organizational structure
documentation
Anti-Money
structure
escalation
Laundering
and training
AML
General
The
program
focusing
on the
customer
AML
systems
Bear Stearns
Groups
identification
Audit Departments independent
organizational
tIP
program
test
of the program
Weaknesses
noted several weaknesses
staff
procedures
surveillance
as well as the Internal
risk
and the firms surveillance
of issues The staff also reviewed
and resolution
and procedures
policies
LC
Legal and Compliance
written
in
LC
firms
the
during the staffs
controls
examination as follows
The firm
resolution
to
assist in
LC
of
issues
document
establish
managing
the
to
LC
reviewing
documented
As
of Rule
violation
senior
The firms
that
LC
the
and proactively
difficult
LC
the capability
LC
from
believe
meetings
The
the
the
to
matters
process
it
the
issues
firm
that the
appears
from
the staff
prevented
were not
in
is
of issues
the
LC function
fact
is
has not formally documented
it
staff requested
is
subject
must have an understanding
business unit that they cover
The
an essential
particularly
that as the
in
for
view
the
all
LC
to
However
discover
the
trends
of the possibility of
it
will
become
issues
the identification or assessment
and
have
legal risk
business grows
risks
of
pertinent to the
all
entire
of how the firm identifies and monitors
responded
by
stating
of the rules and regulations
In
tool
over
trends
LC through
issues that
documenting
firm to significant
description
firm
based on an informal
of the issues that arise in
that
rules laws regulatory requirements
The
is
or trends that develop
issues
firm will be better able to identify
abreast
and expose
documentation
manage
laws to which
practices
system
even for long term employees to remember
organization
escalation
most areas because
track
to
firm stated
changes over time and the
applicable
all
process
in
monitoring and surveillance
be burdensome
will
staff believes
personnel
The finns
over time by simply staying
daily interaction or
developed
required
generally state that
no specific
is
is
controls
l5c3-4
Representatives
develop
firm
the
of issues identified and escalated from
of the lack of documentation
result
process and does not have
time
procedures
but there
trail
management
and resolution
the escalation
written
parties
firm failed to maintain an audit
subordinates
escalation and
Identification
system of internal risk management
The firms
to the appropriate
the
Exchange Act Rule 15c3-4
to
According
and maintain
legal risks
should be escalated
Thus
document
to sufficiently
failed
that
that are
LC
professionals
applicable
addition the organization does not have
to the
an inventory of
12
CONFIDENTIAL
BEAR
01409450
laws and risks that impact
However
business
unit
not aware of
LC
risks
By relying
issues thereby
Many
the
keep
to
the
reviewed
In
many
staff
could
firm
instances
the written
As
written
personnel
of the firms written procedures
in
for
each business
were created or updated
staff
was unable
most areas because
the written
procedures
period
LC
in the
LC
the
in
Guidelines
addition
Working Group and
firm conducts weekly
the
LC issues
Staff
Meetings
to discuss
Staff
Meeting
but does not maintain
believes
staff
groups
is
There
that
The firm provided
Compliance
participation
on the recollections
for the
recollections
possibility
become
internal
in
other
staff believes
of
EMC
list
2004
even
for
that further
LC
for the
There
Senior
also
is
no
to
reviewed
system
are assigned
of working groups
July
2005
is
no written
with
However
this
documentation
customers and the firm The
the
working
and/or
Legal
list
was based
of working groups was not
list
because
to
in
EMC
based
on
the
employee
As noted before
over time and the fact that as the business
long term employees
that
to issues
There
of issues addressed
each area no working groups were formed
changes
Coordinating Group
regarding these working
working group
employees
staff
The firm should consider enhancing
between
control
or resolution
with
from August
areas the
of personnel
difficult
progress
the staff
included
Working
and Compliance Senior
mission statement
or
LC
groups
recorded for the Compliance Senior Staff Meeting
temporary ad-hoc
of the initiation
formal
Litigation
Audit
Senior Staff Meetings
no formal process by which individuals
is
provided
Internal
The firm maintains minutes
an integral part of an effective
documentation
solely
Working Group
LC
maintaining written documentation
warrant the creation of
groups
the
charter
charter mission statement or minutes
The
LC
groups and other
There are several working
Guidelines including the Regulatory
Group Transactional
In
the purpose of the working
defining
during
to test the
The firm does not maintain any charters mission statements or written
meetings included
were
or updated during the
procedures
procedures
result the
were not in place during the staffs review
procedures
each
miss important legal
newly created
LCs
requested
course of the staffs examination
adequacy
senior
for
risks
of the firms written procedures were
The
risks
business unit under their
specific
on an informal process
LC
LC
of the
abreast
that certain
that threaten the
LC
increasing
staffs examination
the
formal risk assessment of those laws
businesses or
LC personnel
with the firm revealed
Interviews
all
responsibility
unit
its
the firm expects
remember
all
the
the
grows
it
issues therefore
will
the
warranted
is
its
process
Ethics
of addressing
conflicts
of interest
Compliance Committee currently
addresses conflicts of interest that arise between the firm and senior management
According to the Ethics
Compliance
Committee charter the Committee shall evaluate
13
CONFIDENTIAL
BEAR
01409451
potential
of interest between
conflicts
However
between
interest
the transactions
in
of interests can
and
the firm
addressed monthly
are
the
and
Corporation
firm does not have formalized procedures
the
Senior Staff
Bear Steams
which
Due
Meeting
engages
between the firm and
arise
of
discuss conflicts
According to the firm conflicts of interest
customers
its
LC
the
in
Senior Executives
its
which
in
there
customers
its
complex nature of
to the
an inherent
is
therefore
risk that conflicts
firm should
the
have
formalized process for addressing these risks
At the time of the staffs review
The
organization
that
is
rules
The group
will
timely fashion
updated
in
policies
and procedures
to
various
left
commencement
Fixed Income
Without
Department
have
As
was
the staff
result
staff also
months
hired in July
later
Compliance function
Senior
been in her position
specialist
who
will
Compliance have
10 The
found
that are
the
firms
some cases
or in
to
be
upon
for
to
six
is
the
EMC
EMC
the
employees
less
the
New
has not performed
its
was newly
to
work
Senior Managing
taking
created
Andrews
within
work
an adequate
The
is
in the
employment
the
at
EMC
Andrews has only
managers of
follow-up review of
addition
One of
Additionally
process of hiring
three senior
Products Committee in that
In
EMC
his
and filled by Gail Andrews
EMC
than one year of experience
movements
on multiple responsibilities
positions
of the staffs field
2005
of the staffs
many personnel
Chief Compliance Officer
since July
own review
the
manager commenced
second
completion
to
addition
open in
individuals
Both individuals
months upon commencement
2005 and
report directly
At the
positions
assigned two
Compliance
concemed with
Vice President
at
understaffed
recently
In
changes which
personnel
her current position for approximately one month
in
resulted in
firm has not performed
submitted
and Equity
noted that there are three senior manager
mangers was
Andrews
Department
time responsibilities
full
within Compliance which have
several
updating
procedures
the staff
significant
The firm has
and Equity Compliance
of Global Compliance
examination
the
place
for
examination the firm had two senior level
and employed by the firm for only
The
in
has undergone
areas of the Compliance
of the staffs
and already
Director
function
be of varying levels of completeness
be the acting managers of Fixed Income
Legal
function responsible
or newly created
The Compliance
in
who commenced employment on
enable the firm to maintain consistent
this
and vetting any new
and procedures
persons
centralized
entire
Compliance Coordination Group
the
policies
by two
10 2005
26 and October
policies and procedures
outdated
implemented
currently staffed
is
function
centralized
and procedures across the
policies
and updating
responsible for writing
September
have
has recently
firm
firm did not have
the
and updating
for writing
responsible
new
an independent
licensing
EMC
products
control
function
the firms written procedures
do not
14
CONFIDENTIAL
BEAR
01409452
new
address the
product
2003
Ken Kopelman
within
Legal
businesses
follow-up
level
Products
and Special
was formed
executives
The committee was formed
and arrangements
may
that
Structured
November
in
and Fixed Income
of Derivatives
Director
of the committee
transactions
products
senior
Senior Managing
the secretary
is
New
process
Committee composed of
Transactions
increase
the
review new
to
firms risk
exposure
Each new product must be sponsored by
committee
to the
product
and also submits
committee communicates
The committee submits
products
new
of the
report
responded
to the
implemented
the
The
product
Audit Department
own
The
firm
the
document
to the
i.e
review
product
the
of new products
NASD
Notice
to
firm failed
CCU
CCU
CCU
in
Thus
New
the firm
accordance
with
NASD
responsible for conducting
is
also responsible
line
review of employee
mails
The
staff
The
that the
in
noted the following
firm has not created
such
businesses
business
The
documented
the
communicated
LC
to the
review
risks
the
conflict
for the
Recommends
of
follow-up
stated
Best
its
Centralized
reviews
for the
firm-wide reviews
NYSE
firms
Rule 342
PCS
of employee
unit
e-mails
businesses perform an
that the
Unit
Compliance
The
The
by
in
depth
CCU performs buzz word search on employee
CCU plays an important role in performing
effective
written
procedures
in
place
Unregulated Products
LC
procedure
adequate
as the residential
staffs
create
and the
and as such should have
Weaknesses
NASD
Conduct Rule 3010 and
with the firm revealed
e-mails
staff believes
surveillance
could
its
control
commenting on
for
procedure
written
Products
surveillance
conducting
for
Interviews
has not performed
has failed to follow the recommendations
maintain procedures for
to
firm has not fully
the
an independent
that
new
status
provided to the Internal
function
business unit which
New
05-2
July 2005
Products
is
business
the
to
is
be responsible
has not established
firm
Members
Practices for Reviewing
11 The
opposed
as
In
on approved
business unit has
However
control
staff believes
department should
audit
Furthermore
interest
in the
new
of the
status
internal
The
this
that the
information
an independent
sponsor
business unit requesting
some evidence
request for
in that
to the
firms follow-up
units response to
business
provided
Committees
procedure
document
assessment of the new product
function
The
to
written
of the committee
disposition
new procedure
firm created
the
the
The sponsor presents the new
proposal The Chairman of the
business unit
controls
associated
that the
with
result
of the examination
and procedures
mortgage business
disclosed
staff the three
LC
weaknesses as
conducted
in
for
EMC
unregulated
and the FID
firm has not formally identified
EMC
and
FID
main legal risks that
and
The firm verbally
EMC
LC personnel
monitor on
15
CONFIDENTIAL
BEAR
01409453
daily basis
They include
The firm monitors for these
part
risks
compliance
addition
monitor
the
EMCs
procedures
compliance
the
The
with loans
to
residential
LC
EMC
The
Intake
firm
business
many
elements are not defined
this
function
such
Intemal
adequate
is
other week
members
oversee
to
On
LC
high cost loan issues
weeks
the
LC
that the
of three members called the
for
15c3-
by
utilized
reports
reports Weekly
LC
Committee
or
Committee meets every
There are seven
not meet
committee does
New
controls
that
in
Legal procedures do not address the Mortgage
The Mortgage
check
required by Rule
Log
Action
to
performed by the business
is
Audit reports Quality Assurance
Report and Weekly
EMC
to
of
in the written
such as Compliancehase
has not developed
reports
elements
required
Legal procedures do not address the various
as the
informed the staff
also
any surveillance
and the FID business as
New Laws Committee
the
does not utilize
has embedded
However
The
the
reviews
performed by Quality Control
written procedures are inadequate
EMC
Legal
The
mortgage
EMC
uses subsystems
purchases
it
surveillance
is
is
firm was unable to define
the
The firm
business
systems these
Compliance
Legal performs these
Additionally
Department
Although
EMC
Furthermore
opposed
EMC
Compliance
operating
its
EMCs
with
compliance
operations
law in
applicable
unit as
EMC
by Quality Control which
noted that although
staff
associated
EMCs
majority of
that the
In
The
risk
of reports some of which
series
produced
are
formally documented
also not
are
risk and transactional
contract
types of risks by reviewing
and some of which
of the business unit
reviews
the
EMC
by
produced
are
law risk vendor
state
Laws Committee meets
committee
sub-committee
to discuss
legal
working
group
developments
The
EMC
called
Legal procedures do not address law changes
Law Change Group was
the
formed
in
July 2005 to address law
changes
The
EMC
Compliance
Audit Department which
Weaknesses
The following
comments
procedures
in
which
procedures
in
accordance
The
firm failed
prime brokerage
Client
procedures are dated 2001
Compliance
in
Regulated
relate
to
to
with
maintain
clients
Vetting Committee
to
NASD
and deficiencies
establish
Conduct
in the
maintain or enforce
Rule 3010 and
written procedures
Approximately six months
The
and apply
to
the
exists
Products
weaknesses
the firm failed
no longer
firms written
its
NYSE
written
Rule
discussing the vetting
ago
purpose of the committee
the
is
to
342
process
firm implemented
of
New
perform reviews of
16
CONFIDENTIAL
BEAR
01409454
hedge fund
existing
the staffs
regarding
review
staffs
the
examination
procedures
this
firm
provided
the staff
however
process
do not
firm revealed
the
state
LC
member from
that
LC
LCs roles
procedures
do not state
concerned
that the lack
has
CIG
the
LC
of the
during the
Group
Interviews with the
process
CIG
and responsibilities in
of documentation
During
not be evaluated
the Capital Introduction
in
involved in the
is
clients
procedures were not in place
these
relating to
role that
new
with the newly created written
period and therefore their implementation could
The firms written procedures
CIG
process of
as well as assist in the vetting
clients
however
role in the
the
The
group
this
CIG
staff
procedures
written
is
is
weakness
LC
failed
the firm failed
report
accounts
Compliance
According
for accounts
for
the
to
review
the
that
day and are not coded
file
have
in
Leveraged Finance transactions
for
of the
conducted
the
firms system as having
Fixed Income Surveillance
firms Excel spreadsheet of QIB certifications
Dealogic
review
Dealogic
If
there
is
the
QIB
list
surveillance
documentation
an audit
Dealogic
request
analyst
this
List
conducted
EAL
list
until
QIB
the report
on
certification
QIB
certification
If
certification
send an e-mail to
such
responsible
is
time as
The
maintained
RR
is
to obtain
received
is
it
staff
is
concerned
certification
is
file
reviewed
on the
check
required
is
located
on
spreadsheet
one and
list
The firm stated
reviewing the Dealogic
for
that
the
that
system however no
regarding the lack of
review
The written procedures
reviews
QIB
certification
certification
of the review
for
trail
has
If
current
Procedures
accuracy and print for inclusion of the firms Excel
for
does not have
Dealogic
request on
it
if
in
BCPO47-A report The BCPO47-A is
44A securities from the
activity in Rule
which Bear Steams does not have
to ascertain
the review for Qualified
written procedures concerning
its
QIB
document
to
containing
previous
on
follow
to
Buyer
Institutional
for the
by the Control
and the Pipeline
Control
Group
Group do
not address
For example
the
surveillance
Expected
Reports were not included
Surveillance
all
Announcements
in these written
procedures
Firm
Response
The firm provided the staff with written procedures for the
were created during
examination
the staffs
and were not
in
place
EAL
that
during the staffs
review period
The
all
Control Group
surveillance
surveillance
finance
reviews
reviews
analysts
deals
failed
to
The
its
performed
written procedures
staff requested
had performed Watch
from the past year
had been
enforce
evidence
List
reviews
that the
for
by not documenting
Control Group
sample of four leveraged
Although the firm did provide evidence
the firm
could
not produce
sufficient
that
evidence
some
that
all
17
CONFIDENTIAL
BEAR
01409455
reviews
had been conducted
provided
for the deals
evidence
Watch List
List
However
review
the
thus there
lack
is
of an audit
firm failed to
the
in
securities
records that
produce
remained on the
security
reviews
for these
trail
of trading
Control Group failed to establish written procedures to document
escalated
through the
for the
procedures
LC chain
The
Global Compliance
staff
escalation
of
command
to
the Senior Managing
items
Director of
noted that the Control Group does not maintain written
of items from the Control Group
surveillance
Director of the Control Group or from the Managing
Managing
Managing Director of Global Compliance
that
the
For example the firm
selected
staff
of the Watch List for the duration
review
the
the
report which documented
added to the Watch
recently
The
with
the staff
analysts
to the
Director to the Senior
The firm also had not documented
the
items
were escalated
Firm
The firm updated
Response
written
its
procedures
this
in
area during the staffs
examination
The firm does not review mortgage
identified in their
criteria
Procedures
state that the
following
which was not
The firm
48
analyst
its
Surveillance
in
BMB 733
Report
revealed
mortgage transactions
are
with the
Surveillance
is
reviewed
for the
Interviews with the
markups and manipulative conduct
he reviews
that
the
performed by the business
unit
accordance
the escalation and
written procedures regarding
review
exceptions
Procedures
state
of mortgage securities transactions
that
Exceptions
with regulatory requirements
are
maintained by the
There
no
is
of issue escalation or resolution for Compliance issues noted in
reviews
Although surveillance
escalated
than miscellaneous
Response
are not
documented
maintained
notes
analysts
BMB 73
Hour Price Look Back Report
issues that are
Firm
follow
accordance
in
with the written procedures
of surveillance
The Fixed Income
surveillance
to
Transaction
transactions
The Fixed Income
The remaining reviews
compliance
failed
documentation
reviews
markups
in
documentation
compliance
that
analyst
report solely for
the
MB S/ABS
suitability authority
surveillance
securities
written procedures
by
for
review
and maintained
the surveillance
Subsequent to the staff commenting
informed the staff that
it
began to document
an exception
markups
and
retain
report called
on mortgage
There
is
products
no record
other
analyst
on
this
weakness
evidence of
its
the
firm
surveillance
reviews
The
Fixed Income Surveillance
address
addition
all
Procedures are inadequate
compliance issues or concerns
the firm failed
to
document
in
that they do not
such as wash trades and parking
these
reviews
The firm indicated
that
In
it
is
18
CONFIDENTIAL
BEAR
01409456
planning to implement surveillance
these written
procedures
reviews
have been
these
noted
staff
on the
located
The
firms physical separation
hallway and
except for
walk
theoretically
material
firms physical barriers
LC
to the
applies
controls
of
room
glass
for these
transactions
those transactions
control
staff
desks
151
for
some leveraged finance employees
desk
Leveraged
in
Finance
areas
appear
Traders
and gain access
to
Thus
leveraged
deal
associated
with
the
be ineffective
to
Laundering
the money laundering
and has not adopted
the ultimate
system for the
for the detection
procedures
trading
the Fixed Income trading desks and Leveraged
risks
holding company
affiliate
group
and prevention
risks
Act Rule
Pursuant to Exchange
must agree as part of the internal risk
establish
document and maintain
of money laundering and terrorist
noted that the firm did not incorporate
its
an appropriate system for monitoring
that pose money laundering
15c3-leaviiiD
during the staffs
firms Fixed Income
and there are few physical barriers separating the areas
The firm has not evaluated
The
firms
the
by someones
Anti-Money
manage
in
non-public information regarding an issuers pending
proprietary
and parking however
Fixed Income traders are situated on the same floor as the
Finance employees
Leveraged
trades
should be strengthened to be more consistent with Section
Act
of the Exchange
wash
and the firm has no evidence that
Madison Avenue
Floor of 383
8tI
identify
Barriers
Information
weakness
physical
Finance employees
could
in
The following weakness
examination
to
established
conducted
Weakness
The
reports
have not been
proprietary
transactions
fmancing
in the
AML
program
The
staffs review
trading accounts
activity
356
Under
transaction
if
C.F.R
103
the transaction
firm cannot determine
Reviews
if
branch
including
not surveilling the firms proprietary
other
is
not
report
any
staff
was advised
AML
broker
to
the
AML
to
report
Committee
that activities taking
program
of the branch office
transactions
proprietary
proprietary transactions
are not submitted
The
Act
suspicious
by at or through
surveilling
those that relate to the
Audit Departments review
things
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19
CONFIDENTIAL
BEAR
01409457
of findings
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CREDIT RISK MANAGEMENT
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20
CONFIDENTIAL
BEAR
01409458
Derivatives Operations
written
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one or more category
ratings
21
ONFIDENTIAL
BEAR
01409459
from the Scorecards
differed
documentation
for the
methodology which
scorecard
OPERATIONAL
RISK
The
the
staff
reviewed
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MANAGEMENT
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to identify
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its
function
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22
CONFIDENTIAL
BEAR
01409460
staffs
2005 Audit Committee Charter disclosed
review of the January
did not identify responsibility
of the Operational
for oversight
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Risk Management
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review of the internal audit policies and procedures that relate to operational risks
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book
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staff
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do not include
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any
in the capital
calculation
23
ONFIDENTIAL
BEAR
01409461
The
firm did not calculate
credit
risk
charges
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its
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FUNDING AND LIQUIDITY
The
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related
reviewed
the
firms funding
of
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as
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and liquidity
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firm should implement
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assist the firm in
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event
CONCLUSION
Thank you for the courtesy and cooperation extended to the staff during the
The firms prompt response to requests for documents and accessibility
examination
the
firms personnel
The
should
facilitated the
staff has
not assume
examination
some concems based upon
that
other activities
to
process
findings
during our examination
of the firm that are not discussed
in this
You
letter
are
24
CONFIDENTIAL
BEAR
01409462
in
ftill
compliance
regulations
or
with the federal securities laws
The above
conclusions
of the
findings are
U.S
Securities
based
summarized
have
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addition
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where corrective
the staff
to
actions
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actions
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improvements
to
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and
each of the findings including
response by December
have already
been taken
30 2005
those where
Please advise
and provide proposed
tirneframes for the remainder of the issues raised
be advised that staff
proposed
applicable
Exchange Commission
Please submit your written response
we
or other
on the staffs examination and are not findings
will
during
continue
future
to
review
the
In
firms progress with
examinations
Sincerely
Mary Ann
Associate Director
Office
of Compliance Tnspections
Examinations
25
ONFIDENTIAL
BEAR
01409463
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01652028
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01652029
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BEAR
01652030
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Jon
1-Tollis
on
020
7066 1614
Regards
Elnar Hoistad
Traded Risk
Team FSA
Cc Andy Murfin FSA Mark Pearlman
CONFIDENTIAL
Bear Stearns
BEAR
01652031
EXHIBIT
CONFIDENTIAL TREATMENT REQUESTED BY
THE BEAR STEARNS COMPANIES INC
BSC--0002
CONTACT
NUMBER 212
JEFFREY FARBER TELEPHONE
FACSIMILE 212 272-5921
272-6631
January
Mr
Division
of Corporation
Finance
United States Securities
100
Street
Washington
Re
Conimission
D.C
20549
The Bear Stearns Companies Inc
No
File
Dear
Mr
This
letter is
in
of The
letter
As you
February 13 2007
filed
1-8989
Cash
Company
response to your
Bear
or
Stearns
requested in
The
letter
your
letter
the
We may
not
Commission
dated
for the
comments
foreclose
Our
September
together
27
2007 regarding the aforementioned
with
repeat the
responses
or
September
adequacy
changes
Commission from
assert staff
or
Inc
its
consolidated
subsidiaries the
captions and comments
contained in
27 2007
are responsible
staff
dated
Companies
Bear Stearns
of September
We
CONFIDENTIAL
and Exchange
N.E
Form 10-K
your
2008
Branch Chief
Accounting
filing
31
John Cash
to
2007 we acknowledge
the
following
and accuracy
of the disclosure in our filings
disclosure
response to staff comments
taking
comments
27
in
any action with respect
as
defense
in
to
the filing
any proceeding
do
not
and
initiated
by the
any person under the federal securities laws of the United States
DTJK_000003592
TREATMENT REQUESTED BY
CONFIDENTIAL
BSC--0002
John Cash
and Exchange Commission
Form 10-K
Summary
Note
November 30 2006
for the Fiscal Year Ended
Policies page 84
Accounting
of Significant
General
Please consider
revising future
to
filings
description of your revenue recognition policy
one location
the policies in
Also
each
required by EITF D-96
incentive
explain
or
fees
why
comprehensive
source of revenue
and to present
explain to us your revenue
please specifically
recognition policies for performance
disclosures
include more of
for
and
us where
tell
the disclosures
you provided
are
the
not applicable
Bear Stearns Response
As requested by
quarter
Summary
31
of Significant
against
filed
interim dates
maintained
Note
Report
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year
are
targets
record the amount due
Our revenue
Summary
at
the
Performance
incentive
different
of Significant Accounting
for
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Transfers of Financial
note that you have
mortgages however
to
it
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normally the end of the
performance
performance
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performance
incentive
page 82
in the
accrued at
level
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Companys Annual
had accrued performance fees
the final
incentive
incentive
level
fees
of performance
was not
significantly
fees Accordingly
disclosure
was unnecessary
page 94
Assets and Liabilities
interests
funds performance
fees are typically
what you describe
does not appear
to
as
subprime
us that your filing
fully
residential
clarifies
your exposure
subprime loans
Although there
may
be differing
sometimes recognized
rate
to
definitions
be loans that have
above prime to borrowers
Borrowers with low credit ratings
CONFIDENTIAL
is
that
30 2006 we
amount of performance
of future performance contingencies
Note
if
31 2006 we knew
end By December
actual
which
incentive
each interim date Amounts
for
recognition policy
fees The amount accrued
from the
at
next interim date
on Form 10-K As of November
through the year
one location in Note
throughout the year based on
fees
performance
reversed
policies in
Policies
not finalized until the end of the contract period
calendar
for the
10 2007 we began
on October
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2007 which
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to date
on Form lO-Q
with our Quarterly Report
Staff beginning
our comprehensive
presenting
We
the
ended August
of subprime residential mortgages they are
one or more of the following features
who
do not qualify
FICO
for
prime rate loans
scores
DT_JK_000003593
BSC--0002
negative
or
Interest-only
Unconventionally
Low
high
based
payments
initial
amortizing loans
loan-to-value ratios
initial
on
period then adjusts to
initial
fixed introductory
rate that expires after
index rate plus
variable
for the
margin
short
remaining
term of the loan
Borrowers with
less
than conventional
of their income and/or net
documentation
assets
on how much
payment amount
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limits
increase
periods potentially causing
at reset
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substantial
may
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increase
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payment amount andlor
substantial
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we
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In
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is
Regardless
of materiality of your exposure
us with the supplemental
information
Please consider
define
specifically
about your
your subprime loans in practice
request that the
Where
information
you provide be based more
does not please provide
information that
alternative
readily
it
specific
which may be hard for you to provide on
ask for information
which can be
that
adjustment period
if
ask that you consider the above definition in general as part of your
above definition
the
and /or prepayment penalties
penalties
rate
subprime loans
However
response
interest
request that you provide
Preface your response
at
prepayment
initial
subprime loans could be helpflil
to
exposure
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may
address the concern
or
Also
guidance
timely basis
at
least in
part but
provided
RULE
83 CONFIDENTIAL
TREATMENT REQUEST
STEARNS COMPANIES INC REQUEST NUMBER
We
define
borrower
or
residential
rather
purchased
established
of
lending
based upon the qualifications
principally
of the loan
Subprime mortgage
based on the then current underwriting
These
conditions dictate
scores
mortgage
than the attributes
guidelines evolve
as
Subprime loans have
or less however
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historical
generally
factors
MADE BY THE BEAR
11
are
loans
or sellers guidelines that
performance
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are originated
evaluated
we
have
or as market
been loans to borrowers with
FICO
considered
RULE
83 CONFIDENTIAL
TREATMENT REQUEST MADE BY THE BEAR
STEARNS COMPANIES INC REQUEST NUMBER 22
The Company requests
that
confidential information
the highlighted
and
information
contained
in
Request
timely notice
Number
be treated
person
on Page
before it permits any disclosure of the highlighted information
The Company requests that the highlighted information contained in Request Number
and that the Commission provide timely notice to the contact
as confidential information
person
that
the
Commission provide
the contact
as
to
identified
identified
CONFIDENTIAL
on Page
before
it
permits any disclosure
be treated
of the highlighted information
DT_JK_000003594
BSC--0002
FICO
and prior mortgage
scores
months or
FICO
score
in the
have some of the features
not in and of themselves
foreclosure
months
last
income
to
you noted above
warrant
are
designated
the
LTV
and
ratio
grades
BKFC
documentation
upon
the
FICO
loans the
number of
allowed
score
The Company
borrowers
matrix that presents the
maximum LTV
day delinquencies
Under
high
Credit
for
mortgage
guidelines for
types credit
full
grades are determined based
or rent
are available
payments
The minimum
LTVs
to
points
loans to
are
subprime
both types with specific qualifications
to
we would not consider
above
be subprime loans unless accompanied
or foreclosure
amortization feature in our subprime loans
documentation of income
is
maximum loan-to-value
current
is
score delinquent payment history bankruptcy
prepayment penalties
or net assets
low
not determinants
initial
rates
of subprime
interest-only
by low FICO
we
Historically
Additionally
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light
high payment increases or
but
may
be features
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loan that
subprime
ARMs
During 2005 and 2006 the majority of our subprime production was hybrid
as
may
MADE BY THE BEAR
and adjustable rate mortgage
features
Interest-only
negative
may
is
In direct response to your definitional
offered
subprime
as
allowed for different documentation
and FICO scores
offers fixed rate
or unconventionally
subprime
subprime designation
maximum loan amount
seasoning
last
presence of these features
83 CONFIDENTIAL
TREATMENT REQUEST
product
as
Loans designated
ratio
however
of
drivers
within the
borrowers reserve funds
include
RULE
The Company maintains
main
PC
histories are the
had
Other considerations
income and debt
household
residual
BK
bankruptcy
of the
regardless
payment
or rent
Borrowers that have
subprime designation
2/28
ARMs
production
ARMs
such
decreased as our
of 30 year fixed rate loans increased
Our responses
mortgages
During 2007 our production of hybrid
are
to the
Comment
Letter requests for data related
based upon our definition above
to
subprime residential
For your convenience
each of the staffs points below in order of appearance within the
we
have repeated
Comment
Letter
and
have keyed our responses accordingly
Please provide us with
comprehensive
analysis
of your exposure
to
subprime
loans In particular
confidential information and that the Commission provide timely notice to the contact
as
identified
CONFIDENTIAL
on Page
before
it
of
the
be
treated
person
highlighted information
DT_JK_000003595
BSC--0002
Provide us with your risk management
philosophy as
relates to
specifically
it
subprime loans Please address
Your
policies
origination
The purchase
Investments
and retained
securitization
in
interests
subprime mortgage-backed
Loans commitments
and investments
in
loans
and
securities
subprime lenders
to/in
Origination Purchase and Securitization
RULE
83 CONFIDENTIAL
The Company provides
securities
mortgage-backed
EMC
subsidiaries
residential
sold
Mortgage
BSRM
Mortgage Corporation
We
is
impacted by the expected
each have subprime underwriting
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apply to each
performance
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2006 from
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In
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BSRM
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in
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went from
31
2007 to JIJJJjJ for the quarter ended August
documents
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on
loans
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The mortgage
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file
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Credit
patterns
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personal
credit
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income
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information
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company
delinquency
of credit
applicants
certain
third
independent
an application
the
programs
reporting
of obligations
include
respect
as
by
for acceptability
generally
with
or
internally
origination
documentation
approved
number
2007
of loans closed with flill
employment history
verified
from an
As
or
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standards
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amended
dictate
For example
information
reduced
that represent
Throughout
EMC
through securitization
conditions
Loan packages
provides
under
applicant
for the
time of origination
subprime production was reduced
28
percentage
guidelines
history
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firm prior to purchase
diligence
credit
2005
BSRM
performed
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borrower
and
ended February
for the quarter
2007
EMC
loans in
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at
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pricing
price
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quality
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All guidelines
evaluated
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EMC
only originate or purchase mortgage loans that
can be sold into securitization structures
purchase
These loans are sourced through our
investors
to
Corporation
with the resulting
loans for securitizations
mortgage
on each
measured
demonstrated
be
intent
on
to
repay reports
as
confidential
identified
CONFIDENTIAL
on
that
information
Page
before
the highlighted
and
it
that
the
information
contained
Commission provide
in
Request
timely notice
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Number
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DT_JK_000003596
BSC--0002
RULE
CONFIDENTIAL TREATMENT REQUEST
loans purchased
All
laws
guidelines
and
require
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As of August 31 2007
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MADE BY THE BEAR
83
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CONFIDENTIAL TREATMENT REQUEST MADE BY THE BEAR
RULE
We
83
approve
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all
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Research
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We
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perform
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Request
and that the Commission provide timely notice
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5The Company requests that the highlighted information contained in Request Number
and that the Commission provide timely notice to the contact
identified
subprime
principal party
state licensing
insurance provide quality control reports and policies and procedures
we
have
originating
must provide
statements have applicable
addition
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years experience
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financial
includes
from Market Asset
review and on an on going basis to
approval
process annually
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For brokers this process
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DT_JK_000003597
BSC--0002
and an annual recertification
monitoring
and repurchases
payoffs delinquencies
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Our
interests
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along with
value
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Fair
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to securitize
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identified
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year
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Risk reports are reviewed
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This credit analysis
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curve
impact of risk layers in
of subprime whole loan collateral to
financing
facilities
yield
well as other relevant
as
Traders hedge both interest rate and credit exposure
hedges
indices
approval
last
for residential loans
hedges include
primarily industry
are
hazards model with the prepayment
most
of market risk and position size
impact of their related
Interest
the
Over the
Moodys Economy.com
established
the level
future
loans with performance
the
capture
competing
is
projections
employment and population
Risk limits
of
MADE BY THE BEAR
are estimated and implemented
of the model
price
conjunction with
at
assumptions
sample of over
data
ten
regular basis to reflect
home
owned
through our
determine the appropriate
underlying
charge-off as the two possible terminal states for
recalibrated
purchased
assumptions including time value
RULE 83 CONFIDENTIAL TREATMENT REQUEST
are
instruments
as financial
Econometric models are used by the trading desk and risk
factors
Our models
All securitized retained
loans
based on the net present value
models or methodologies as well as the appropriate
CONFIDENTIAL
early
and sellers
subprime mortgage securities
in
originated
is
generate these
to
factors
volatility
as
portfolio
terminate brokers
suspend and/or
originations are
other
standard models that consider
the
ongoing
poor performance
Retained
fair
conduct
of both brokers and sellers for early payment defaults
monitoring
performance
we
addition
In
to
Number
the contact
includes
be treated
person
any disclosure of the highlighted informntion
DT_JK
000003598
BSC--0002
review of operating profile financial data and on-site due diligence by the Global
Credit Department
Finance
Desk
and Warehouse
During normal operation of business there
on
funding
the
warehouse
collateral
pledged
guidelines
as
to
as well as
loan level
all
file
is
group
received
is
review that the loan data meets our
determined by the quality of the underlying
rates are
The loan
collateral
Agreement and
Repurchase
from the borrowers corporate
in
many
is
cases
parent
with each finding or payoff and monitored daily by our
priced
Changes
to
market
the
desk to re-price the loans Each
delinquency which may
data prior to
conforms to the credit
collateral
all
well as the creditworthiness of the counterparty
The loan data
warehouse
that
us under the terms of the Master
enhancement
trading
Advance
review of
is
determine
guidelines for that lender
approval
compliance
credit
line to
Finance
or
month
require that loans
are
lender
particular
the collateral
removed from
would
also require the
reviewed
is
the
for
warehouse
aging and
line
83 CONFIDENTIAL
RULE
The Company
also
provides
financing for securities
Global Credit Department sets reverse repurchase
credit quality
and funding capacity
us Global
with
limits
counterparty
industry
counterpartys
of
meet
its
credit limits
who
all
enter
notional
after collateral
counterparties
management
and other factors relevant
This credit opinion
obligations
amount lent term of
securities
over-collateralization
trade
in consultation
requirements
is
to the
expressed in the form
product limit
with Global Credit
rates against
is
also
is
responsible for
this collateral to
responsible for
and making margin calls when
for
various
collateral
types
aggregate
are as
confidential information and that the Commission provide timely notice to the contact
as
identified
CONFIDENTIAL
on
Page
before
it
for
measure of stress loss exposure
Our Finance Desk
The average margin
value declines
and
and associated advance
obtaining daily market prices of the securities
collateral
with repo
assessment of the financial condition of the
Our Finance Desk
approving individual
based on the
into these transactions
numerical internal credit rating and aggregate credit risk limit
repo includes
meet
conditions
to
ability
repo
of the counterparties
conducts periodic credit reviews of
Credit
based on the departments
Our
backed by subprime collateral
follows
be treated
person
DT_J K_000003599
_______BSC--0002
__________________________________________
II
Unrated
of subprime residential mortgages If practicable
Quantify your portfolio
breakout
words
the portfolio to
the
please
underlying reason for subprime definition in other
LTV
payment increase high
to
subject
show
interest
ratio
only negative
amortizing
on
and so
MADE BY THE BEAR
RULE
83 CONFIDENTIAL
TREATMENT REQUEST
We
define
borrower
or
to
of
question
evolve
These guidelines
Subprime mortgage
historical
as
Subprime loans have
conditions dictate
scores
of the loan
than the attributes
based on the then current underwriting
purchased
established
lending principally based upon the qualifications
mortgage
residential
rather
or less however
other
generally
factors are
performance
31 2007
in
we
loans
the total
hybrid
fair
ARMs
to
lending based upon
repay
as
of November
jSjJ1j4j
as
discussed
have
or as market
in
FICO
our response
MADE BY THE BEAR
1010
stated at
maintain our portfolio
listed in the
regarding
value
Total
fair
30 2006 was
in fixed rate
mortgage
fair
2$1IJd
As
and
it
consisted
of
loans
lending based primarily upon the
debt rather than the attributes
the characteristics
of the loan
we
do not in the
of subprime residential mortgage
Comment
Letters request
subprime residential mortgages
Explain
how you
category
loans
Non-performing
Non-accrual
loans
The allowance
The most
for
recent
loan losses and
provision for loan losses
The Company requests that
as
and
the
Quantify the following
each
owned
is
value was approximately
define subprime residential
ability
ordinary course of business
define
we
above
value of subprime mortgage
borrowers
evaluated
been loans to borrowers with
considered
The Companys inventory of subprime mortgage loans
Because
is
of the
are originated
or sellers guidelines that
of August
loans
the
and
highlighted
that
the
information
Commission
contained
in
Request Number
provide timely notice
to
the contact
be treated
person
on Page
The Company requests that the highlighted information contained in Request Number 10 be
treated as confidential information and that the Commission provide timely notice to the contact
identified
10
person
CONFIDENTIAL
identified
on Page
before
it
permits
any disclosure
DT
JK_000003600
BSC--0002
RULE
83 CONFIDENTIAL
Non
and non accrual
performing
accrual
loans
are
been received
100%
fair
days past
value
as
2007 were
for
which
At
due date
its
at
fair
this
Non
value
the principal
and interest
the interest
point
principal balance of non performing
of November
The unpaid
fljI
respectively
loans are carried
as loans
The unpaid
reserved
related
defined
30
principal
and
Quantify the principal
4jiI
2006 were
balance and the related
and non
performing
payment has not
receivable
balance
is
subprime loans and the
and f414tfjfj5
fair
value as of August
31
respectively
amount and
nature
of any retained
securitized
interest in
subprime residential mortgages
Our
retained
interests
in
non investment grade
subprime
residential
residential
loans
subprime securitizations are comprised of investment grade and
securities
loans or
The
MADE BY THE BEAR
1212
fair
that are carried
at
ABS CDOs whose
value of these retained
fair
interests
August 31 2007 were $3JJ4$$Jj and
The underlying
value
ultimate
underlying
as
assets
of November
respectively
assets
are
are
subprime
30 2006
and
Please see the table
below
Investment Grade in millions
8/31/07
11/30/06
AAA
AA
BBB
Total Investment Grade
Non
Investment Grade in
8/31/07
11/30/06
millions
The Company requests that the highlighted information contained
as confidential information and that the Commission provide
treated
identified on Page
person
treated
person
as confidential
identified
before
that
information
on Page
it
permits
the highlighted
before
and
it
that
permits
any disclosure
information
the
Request
Number
timely notice
to
11
be
the contact
contained
Commission provide
any disclosure
in
of
the
in
Request Number 12 he
timely notice
to
the contact
10
CONFIDENTIAL
DTJK
000003601
CONFIDENTIAL
_____________________________
Unrated
Non
Total
BSC--0002
_______
BB
_____
Investment Grade
Total
We
typically
name
single
hedge our cash subprime exposure with
flS
credit default
reduced by our
CDS
swaps
our subprime retained securitized
described
exposure
in
CDS
net short
combination
ABX
of
index and
At August 31 2007 our subprime exposure was
position This short
described
interests
CDS
position
hedges both
here as well as the subprime
item
Quantify your investments
in
backed by subprime mortgages
any securities
RULE
MADE BY THE BEAR
CONFIDENTIAL TREATMENT
REQUEST
83
Our investments
at
collateral
fair
at
value
fair
value on
by subprime loans are included in Financial
backed
in securities
owned
instruments
the
l3
Financial instruments owned
or
Consolidated
and pledged
Statement
are
subprime residential loans or
residential
subprime
The
loans
ABS CDOs
November 30 2006 and August 31 2007 were
Quantify the current
whose ultimate underlying
value of investments
fair
delinquencies
in
13J4jjj
in retained
They
these securities
as
and j1JJ11JjJ1
securitized
are
The underlying
comprised of investment grade and non investment grade securities
assets
as
of Financial Condition
assets
are
of
respectively
subprime residential
mortgages
There are two standards
OTS/FFIEC rule
payment
method
is
is
the
by the loans
Mortgage
loan increases
calculation
by
as the
delinquency
loan increases
Essentially
not received
known
for reporting
is
important because
the
status
MBA
The Company requests that the highlighted
as confidential
person
identified
and
information
on Page
before
it
that
permits
the
is
MBA
method
is
the
used in
information
contained
in
the
Request
of the highlighted
not received
prime
non-prime
Number
Commission provide timely notice
any disclosure
is
This measurement
standard in the
standard
second
In this
monthly payment
if
as the
monthly
month The
the
is
known
if
loans next due date
calculation
mortgage markets while the OTS calculation
subprime Alt-A home equity etc markets
treated
first
delinquency status
Bankers Association
end of the day immediately preceding
distinction
The
due date in the following
delinquency
its
status
its
to
13 be
the contact
information
11
CONFIDENTIAL
DT_JK
000003602
BSC--0002
RULE
83
As of August 31 2007 we have
and
foreclosures
days delinquent
retained
interests
Using the
subprime securitization trusts
REOs
with
from
value
fair
OTS methodogy
delinquency
As of August 31 2007
the
defined
is
as
average
delinquency of these trusts was
Quanti
residential
any write-offs/impairments
related
to retained
interests
in
subprime
mortgages
MADE BY THE BEAR
RULE
83 CONFIDENTIAL
TREATMENT REQUEST
The Companys
inventory of retained
interests
in
i515
subprime securitizations
value
with resulting net unrealized gains and losses reflected
in the
Consolidated Statements of Operations
securitizations
securities
Our
loans are comprised of investment
The underlying
assets
are
interests
reflected
unrealized losses of
retained
interests
reflected
unrealized losses of SI
all
is
Principal
interests in
stated
they are consolidated
fair
subprime
tttkn
flti
ABS CDOs
whose
As of November 30 2006 our
loans
As of August
31 2007
our
LaL
involvement with special purpose
entities
or variable interest
and quantify the subprime exposure related to such entities regardless
for the
at
Transactions
grade and non investment grade
residential
retained
Please address
retained
subprime residential loans or
ultimate underlying assets are subprime
entities
in
purposes of generally accepted
accounting
of whether
principles
83 CONFIDENTIAL
TREATMENT REQUEST
MADE BY THE BEAR
RULE
The Company has
securitized
through
loans for fiscal year ended November
mortgage loans for the nine months
1616
SPEs
residential
30 2006 and S6S1aJJIJ
ended August
31 2007
business our ongoing involvement with such SPEs and other
14
treated
person
identified
on
Page
before
it
permits
any disclosure of
the
person
16
identified
on Page
before
it
permits
information contained
person
on Page
before
it
permits
normal course of
SPEs which have
in
Request Number 14 be
timely notice
in
to
the contact
information
timely notice
to
the contact
any disclosure of the highlighted information
treated
identified
In the
highlighted
treated
mortgage
of subprime residential
any
disclosure
in
timely notice
of the highlighted
to
the contact
information
12
CONFIDENTIAL
DT_JK_000003603
BSC--0002
derivative
primarily of mortgage loan servicing and
loans consists
subprime mortgage
securitized
transactions
MADE BY THE BEAR
ofj
As of November 30 2006 and August 31 2007 we were
loans
with
an unpaid
principal
balance
17
servicing
thj respectively
MADE BY THE BEAR
The Company
enters
into derivative
1818
ABS CDOs
with SPEs
transactions
subprime mortgage
and
which
subprime
ABS CDS ABS CDOs accumulate exposure to subprime
assets either by purchasing
subprime securities Cash ABS CDOs or by selling credit
ABS CDOs In the latter case the
protection on subprime reference assets Synthetic
Syntheitic ABS CDO will have cash to invest from the proceeds of notes they have sold
to investors
The ABS CDO will use this cash to invest in AAA collateral which may in
reference
addition
securities
be wrapped
losses related
to the
noteholders
In
counterparty
are
typical
credit derivative
we
We
guaranteed
contracts
and whatever
Synthetic
ABS
collateral in
counterparty
which
the
to the
CDOs
note proceeds
below
our ongoing
credit risk
certain
find
level
management
protection
from SPEs on
notional
receivable
of
In
CDO
which
securities
to
protection
may
from
within the Synthetic
some
under our
example
the securities
par made up by the wrapper and
for itself
at
its
own
cost
if
is
it
with these terms as part of
resulting
ourselves
total return
in
fair
value
provide the wrap
swap
on
the
The swap pays
the
LIBOR
based return guarantees to make up any shortfall relative to par and
entitled to receive
any premium to par when the collateral is sold As of August 31
2007
the
notional value
value payable
of these
total
return
CDS
terms relating to the
As of August 31 2007 we bought
we may
via
Synthetic
we may make
the
ABS CDO
requirement
to
As
holders
for
value of
ABS CDO
the
that
monitor compliance
cases
used to pay any
be invested including
are eligible the
process
certificate
all
contractual
replacement
We
is
due to the credit derivative
payments
market regularly with any discount
downgraded
This collateral
remains will be paid back to
the
various
incorporate
requirement that the wrapper
collateral
party
on this collateral to pay any claims
on the kinds of
be marked
CDO
who has bought
therefore typically
limitations
third
by
senior in terms of cash flow priority
are therefore relying
trades
the
i.e
CDS
swaps were
representing
is
fair
of
as confidential information and that the Commission provide timely notice to the contact
person identified on Page
treated
18
treated
person
identified
on
Page
before
it
permits
13
CONFIDENTIAL
DT_JK_000003604
BSC--0002
RULE
CONFIDENTIAL TREATMENT REQUEST
83
In addition to
we
These purchased
interests
ABS CDO
Synthetic
protection
it
will
may
notes
sells
on
the protection
super senior
August
accumulating
are
superior
CDS
has sold exceed
the notional
representing
fair
is
portion of the total notional of
for
the
amount of
for
responsible
super
of
the
above
notes
For the
counterparty
further
losses
If
to the
As of
were
super senior interests
jJJfl
senior risk
the
making up any
value of these synthetic
value payable
market risk on this synthetic
CDO
the
buys super senior protection rather than selling notes
it
purchased
protection
31 2007
it
ABS
cases
In these
has sold and invests the proceeds in collateral as described
remaining part of the notional
losses
synthetic
investors
to
which
purchase interests issued by the
occasionally
include
19
ABS CDOs
from Synthetic
buying protection
subprime exposure
MADE BY THE BEAR
of our
Approximately
has been sold to other non-SPE
counterparties
The Company
SPEs though
rate
also enter into derivative
rate
primarily
derivative
swap counterparty
are
SPE may
may
are securitized
our
for
counterparty
own
April 2006 the Company established
subprime securitizations and sold interests
investors
with
the
SPE
we
levered retum
wa1jj
collateralized
by
the
flow priority
also
subprime residual
SPE which
in the SPE
interests
collateralized
collateralized
by subprime
Please quantify and describe
any and
are typically
to
to
may
The payments due
all
residual interests
investors
In
of
order to provide
SPE which was
residual interests
to the
fair
potential
act
to
holders
certificate
As of November 30 2006 our loan
with
all
We
MADE BY THE BEAR
purchased
by subprime
residual interests
risk
2020
loan to the
provided
As of August 31 2007 our loan
of
rate
subprime securitizers transactions
senior in terms of cash
the derivative
subprime securitizations and
In
SPEs where
have subprime exposure
use different forms of interest
swaps and caps to manage interest
for other
swap counterparty
the
assets
with
transactions
subprime securities but the
which subprime
derivatives
the interest
as
will
does not reference
itself
with
fair
to
value
SPE was
value of
repurchase
commitments you may
have regarding subprime residential mortgages
19
treated
person
zO
as
identified
on Page
before
treated
person
as
the
the
identified
on Page
before
information
highlighted
and
that
the
information
highlighted
and
it
that
in
timely notice
to
the contact
permits
it
contained
Commission provide
the
permits
contained
in
Request
Number
Commission provide timely notice
to
20 be
the contact
14
CONFIDENTIAL
DT_JK_000003605
ThE BEAR STEARNS COMPANIES INC
BSC--0002
The Company provides mortgage loan
loan securitizations
our mortgage
breach
is
not cured
Agreement
the
risks
originators
have
for assets
we
estimate
our exposure
Also
warranties
and
securitization
if
for potential
we
we
sold
such
our exposure
for potential
obligations
The maximum
potential
third party
be equal to the current
amount of
have
We
do not provide any early period default
related
no
Describe
repurchase
any other potential
unlikely
for
we
commitments
related
to
the receipt
protection
of assets
sold
estimate
to
into
for
of the
arrangements
Company
subprime loans sold
commitments
repurchase
be subject
in
repurchase
exposures
that these
statements
may
and
be required to make would
potential
exposures you
to
will
Quantify and describe any loans to commitments in or investments
lenders
will
third party into
obligations
liabilities
could
is
it
EPD
EPD
to
we
financial
subprime securitizations and therefore have
its
subprime loans
all
material impact on the consolidated
fulfill
recorded
based on our experience
have
into
from such
breaches of representations
to
breach management
payments
will
have
that
to assets
management
securitization
not
may
balance of
outstanding
However
securitizations
and maintain
loan originated by
has had
We
future
To
plus related expenses
purchased
repurchases related
repurchases
these potential
loan with
the
repurchase
of such assets
subprime mortgage
believe
to
addition with respect
In
with
and the
seek to obtain appropriate representations
subprime mortgage loan which
the related
breached
is
Pooling and Servicing
trust
assets
mortgage loan was originated by us and sold into
If
warranty
the
the obligation
on
originated
the acquisition
upon
by
sold into the securitization
been originated by third parties
third-party
we
perform due diligence
standards
underwriting
was
it
we
or
representation
securitization trust
breach at the price
mitigate these
If
within the time period specified
for that
and warranties in connection
representations
in
to such
bankruptcy
for
subprime
as
example
MADE BY THE BEAR
financing
warehouse
lending
originators
and investors
facilities
the
of subprime
by newly
of November 30 2006 we had customer
was funded
As
of August
which
21
treated
person
31 2007 we
was funded
as
confidential
identified
that
the
In
and
on Page
before
it
that
permits
loans
facilities
we
Through
subprime mortgage
ofjj
subprime mortgage
contained
Commission provide
in
loans
As
of which
of
facilities
provide funding
information
the
counterparties
its
to
originated
had customer
addition
highlighted
information
collateral to
Company provides
collateralized
2121
of
to investors
Request
Number
timely notice
to
21 be
the contact
15
CONFIDENTIAL
DT_JK
000003606
of
BSC--9002
collateralized
of which
ffl1IjP
As of August 31 2007 we had
by subprime loans
ST1T4
total facilities
was funded
RULE 83 CONFIDENTIAL TREATMENT REQUEST MADE BY THE BEAR
Additionally
Company provides
the
repurchase
reverse
by mortgage-backed
loans or
repurchase
We
whose underlying
securities
ABS CDOs
of November
whose
30 2006
agreements
financing for its
customers
These reverse repurchase
agreements
ultimate
was
the
of subprime residential
amount outstanding
and
do not have any investments
agreements
consist
collateralized
are collateralized
underlying assets are subprime residential loans
31 2007
and August
assets
through
As
under these reverse
respectively
any subprime lender other than our wholly owned
in
subsidiaries
Quantify your revenues from involvement in subprime loans
revenues based on fees interest
earned
servicing rights
and other
such
Breakout
sources
RULE 83 CONFIDENTIAL TREATMENT
REQUEST MADE BY THE BEAR
The Companys
Realized
inventory of mortgage loans and securities
and unrealized gains and losses fees interest
Transactions
in the
Consolidated
Statements
is
stated
at
fair
value
earned are reflected in Principal
of Operations
Resulting revenues
are
below
FY
000
Revenues
rtans
Securitization
IServicing
Se
fl
Fina nce
and
that
information
the
rjy2oo6rjyTD3
000
3W
rEai
treated
FY2005
2004
2007
000
000
PU1
rwa
flfl
contained
Commission provide
in
Request
Number
timely notice
to
22 be
the contact
identified on Page
treated as confidential information and that the Commission provide timely notice to the contact
person
person
identified
on
Page
before
it
permits
any disclosure
16
CONFIDENTIAL
DI JK_000003607
BSC--0002
CONfiDENTIAL TREATMENT REQUEST
RULE
In
Company
the
addition
2006 and
fiscal
MADE BY THE BEAR
83
has revenue of
of
losses
4$j7
2424
2005
for fiscal
for
CDOs
of fiscal 2007 from
for the third quarter
with subprime collateral
As
matter of course
backed
as securities
we
do not track our secondary
by subprime residential
revenue by asset class such
trading
loans
mortgage
these revenues
Therefore
are not reflected above
Where we have asked you
of the end of your
we
full
quantify
to
amounts
have asked you to quantify amounts for
years and any more recent period
fiscal
as
point in time please do so as
of
Where
year and as of the most recent date practicable
fiscal
last full
provided any of the information
period please provide
practicable
if
If
this for the
believe
you
last
three
you have
that
requested in public filings please direct us to such
disclosures
The above
list
other
quality
asset
If
or
you believe
please explain If so
If
about
you believe
possible
all
To
encompassing
the extent
information or other factors
that
that
you
provide
us
on your
adverse impact
material
loans
what consideration
you may give
inform readers of your level
material
financial
please
adverse impact
more
to
of
results
condition
from your involvement in subprime lending
us what disclosures
tell
aware of
are
well
resulting
tell
this to
that
as
material
that
or liquidity
disclosure
be
to
performance
information
that
operations
not intended
about your involvement with subprime residential mortgage
information
provide
is
is
remote
transparent
of involvement
from this exposure
resulting
you may consider in order to provide
is
reasonably
clearer
of this exposure
understanding
We
believe
the
broader
financial
chance
is
that
based on the
future
which
drive
in
less
than likely
subprime lending
such exposures
if
material
and
we
is
that will
seek
to
subprime lending and
adverse impact on the
reasonably
result in
In future filings
will
in
we
possible
material
will
Companys
i.e
the
adverse impact
consider
our level
of
enhance our disclosure of positions
necessary
Note 13 Stock Compensation
24
of involvement
of operations or liquidity
event or events occurring
more than remote but
involvement
level
impact on global credit markets
condition results
of
Companys
Plans page 104
treated
person
identified
on Page
before
it
permits
17
CONFIDENTIAL
DT_JK_000003608
BSC--0002
Please clarify
how you
for us
appropriate to include
stockholders
stock-based
that in years prior to fiscal
2006
granted
in
December
compensation
in
December
compensation
was
it
in
following the
November year end
at
equity
concluded
We
have historically finalized our stock-based
end of the related fiscal year
Grants of stock-based
Compensation Committee of our Board of
17 of
Paragraph
estimate
the
fair
123 states that the objective
value
based on the stock price
service
from
instruments
may
service
made
award
period and
period Stock-based
measures under
award
the
Committee Additionally changes
not affect the amount recognized
to the
of
adoption
SEAS
23R
included in stockholders
in the price
in the
equity
defines
the grant
employer becomes
transfer assets
that
that
approval
example
to
if
approve
the
to
is
management
the
at
who
unless
are
obtained
the price
The
of the employers
The employee does
not
we
formal plan
renders
approval
grant
date
from
equity
or
the
during that
of stock-based
Companys Compensation
Companys
financial
stock
year end did
afler
statements As such prior
in
granted
December
was
2005
SEAS 123R
the grant
date
the requisite
approval
is
mutual
are
essentially
to issue
service
The
equity instruments or
Awards made under an
not deemed
formality
to
be granted
until
or perfunctory
for
of the board of directors control enough votes
for
are
awards that are subject
not deemed
to be granted
to
an award of equity instruments
be adversely
affected
by
approval
until
is
subsequent
all
by
such
the date that
changes in
shares
begin to benefit
concluded
service
is
employees
to
share-based payment award
of
on
from and
stock price until the awards are approved
Accordingly
the
of the
Similarly individual
to benefit
award
the
an employer and an employee reach
board of directors management or both
approvals
employees
required on December
and the members
arrangements
an employee begins
the
as
which
subject to shareholder
obtained
for current
when
November year-end
at
contingently obligated
an employee
is
date
amount of awards
compensation
of the key terms and conditions
understanding
arrangement
as the date
the
123 were based on performance
consolidated
stock-based
The Company adopted SEAS 123R
date
subsequent
the
to
SEAS
was not adjusted when approved by
compensation
award
stock-based
formal plan and the dollar amount
an established
to
is
when they have rendered
dollar
total
attributable
is
awards granted under
process
necessary to earn the right to benefit
of
the grant
determine the
that
are
date of stock options or other
provided for by the terms of an established
is
the factors
plan designates
for that
SEAS 123
Under
be the end of the fiscal period instead of
the
if
entitled
and satisfied any other conditions
requisite
by the
and employees
of the measurement
the grant
at
become
employees
December
in
approved
are
week of December
SFAS
equity instruments to which
the
Directors
of the grants in the second
generally notified
compensation
that the
grant
by
date
is
is
the
not adversely
impacted
by changes
in
Compensation Committee
the date the
awards are approved
in
18
CONFIDENTIAL
DT_JK_000003609
BSC--0002
mid-December
While the grant date
subsequent
is
year end
to
the
Company
accrues
the
of the awards over the service period
costs
view towards
With
earnings
related to
future
why you
disclosure please explain to us
CAP
for
adjustments
an Other
units as
amounts
classify
Expense
in
your
of Income
Consolidated Statement
Our
Accumulation
Capital
unsecured
formula
CAP
additional
viewed
disclose
which
similar to
Expenses
With
CAP
in the
to
your
to
Accrued
in earnings
an enhanced
to
the
units
to
based on
earnings
have
an
fixed
each participant in the form of
fixed
dividend on an
the
units
income based on
in
second class of
units as
Statements of
future
CAP
credited
are
CAP
outstanding
participation
our financial statement
Consolidated
view towards
related
Earnings
with respect
units
that
provides
view CAP Plan
participates
maimer
in the footnotes
attributable to
in
We
units
in
CAP
CAP
Earnings
CAP
preferred return
are
Plan
receive on an annual basis
right to
common
CAP
formula
RSU
Earnings
Additionally
Amounts
following
stock with
we
recognized
adjustment are recorded
in
Other
Income
disclosure please explain to us
why
certain
amounts
stock units and stock option awards are included
restricted
and Benefits
Employee Compensation
in
your Consolidated Statement
of
Financial Condition
As discussed
in
our response to question
on December
is
2005
date was subsequent
the service
by
approved
the
These costs were
to
above we adopted SFAS
SFAS 123R we concluded
the
November 30 2006
period fiscal
2006
If
the
reflected
in
Accrued
the
Company
stock-based
by
with
such
as
required
date
in
Beginning
CAP
requisite
the
mid December
grant
Consolidated Statement of Stockholders
with the stock-based
Plan and the Restricted
service
period
no longer be accrued
in
As
compensation
Stock
result
awards were not
Employee Compensation and Benefits
30 2006 Upon
of Financial Condition as of November
Plans on
accrued the costs of the awards
compensation
value would have been paid in cash
with respect to fiscal 2006 awards were reclassified to
the
123R
that the grant
date the awards are approved by the Compensation Committee While the grant
the
over
accordance
In
date
Employee
of this change
amounts
Stock
approval
accrued
Compensation
Equity
awards granted
Unit Plan the
the
in the
in
Company
December
adopted
the costs related
2007 under
three
to these
Accrued Employee Compensation and Benefits
year
awards will
in the
of Financial Condition
Note 17 Commitments and Contingencies
page 113
19
CONFIDENTIAL
DT_JK_00000361
BSC--0002
We
note your disclosures
you cannot estimate
that
there
reasonable
only
is
here and under legal proceedings
losses or
number of proceedings
have been in process
possibility that
identified
it
unclear
is
any quantitative disclosures
the
In
proceedings
amounts
expensed or reversed
please
do not have the ability
10 of
by paragraph
us and
tell
contingencies
to
at
Given
been incurred
the
of time some of those proceedings
why you
us
to
including your disclosure
matters where
have
may
loss
and the length
required
addition
accrued related
ranges of
losses for
revise
SFAS
for
future filings
at
to
to
provide
least
some of
disclose the
each balance sheet date and the amounts
during each period
RULE
83
The Company records
probable
loss
loss accruals
for litigation
was not disclosed
as
was not deemed
it
The amount reserved
of which
2005
December
related
Note
an
for the
statement
disclosed
expense
For the litigation
to legal
mailers
loss related
be resolved
not believe
to
such mailers
or
it
what
further
the
the
how
is
Company could not
SEC
as
In
NYSE
and
of November
material to the
30 2006
possible under
predict
for the financial
30
consolidated
and
2005
the
respectively
SFAS
as
of
with certainty the range of
be resolved when
settlement fine penalty
necessary
mutual fund trading
and
of reasonably
such mailers will
eventual
disclosure
was not deemed
was J$JNJJffII
mailers that met the scope
November 30 2006 and 2005
30 2005 was
Companys Annual Report on Form 10-K
in which we stated that the Company was
For the year ended November
of financial condition
related
as
of financial
statement
with the
settlement The remaining amount reserved
was not
2005
relating to
of settlement
offer
of
in the
17 Commitments and Contingencies
reserved
frilly
net
to investigations
Company announced
the
criteria
This amount
consolidated
matters as of November
This was also disclosed
for
in
material to the
for legal
SFAS
estimated The amount
30 2006 was
reserved for these legal mailers as of November
condition
mailers meeting the
and for which the loss amount can be reasonably
or other
they will
relief
statements
to
might
ultimately
be We
do
be presented
fairly
25
information contained
treated
person
identified
on Page
before
it
permits
any disclosure
of
the
in
Request
Number
timely notice
to
25 be
the contact
20
CONFIDENTIAL
DT_JK_00000361
CONFifiENTIAL
BSC--0002
John Cash
If
you have any questions
Jeffrey
at
and Exchange
212
Farber
or require
Senior Vice President
Commission
further
information please do not hesitate to contact
Finance and Controller at
212
272-6631
or
me
272-4390
Sincerely
Samuel
Molinaro Jr
Executive
Vice President
Chief Financial
Officer
and Chief Operating Officer
21
CONFIDENTIAL
DT_JK_000003612
EXHIBIT
STATES
UNITED
AND EXCHANGE COMMISSION
SECURITIES
WASHINGTON
D.C
20549
OFFICE OF
INSPECTOR
GENERAL
25 2008
September
To
Chairman Christopher Cox
Erik Sirri
Lori
of Trading and
Division
Director
Richards
Markets
Office
of Compliance
Inspections and
Division
of Corporation
Finance
Director
Examinations
John White
Jonathan
From
Director
Sokobin
SECS
Audit of
Assessment
of Risk
Generak
David Kotz Inspector
Subject
Office
Director
Bear Stearns and Related
Oversight of
Consolidated Supervised Entity Program Report
memorandum
This
transmits the Securities and
Inspector Generals
SECs
OIG
Oversight of Bear Stearns and Related
Supervised
Entity
Congressional
Program
This
audit
Entities
Entities
was conducted
The
446-A
Commission
on
results of our audit
Office
of
the
The Consolidated
pursuant
Member Charles
from Ranking
request
Exchange
report detailing the
final
No
to
Grassley of the United
States Senate Committee on Finance
The
that are addressed
of 26 recommendations
report consists
final
TM
and Markets
the Division of Trading
Recommendations
primarily to
18 and 25 are also
addressed to the Office of Compliance Inspections and Examinations
Recommendation 19
is
also addressed
Recommendations 20 and
Finance
CF Recommendation
Recommendation 22
In
response to the
out of 26
is
draft
17
addressed
TM
Your
Chairman
concurred
with
written
their entirety
but disagreed
responses
in
to
Appendices
Coxs and Managements comments
Assessment
and
ORA
of Corporation
TM
officials
and
agreed with 21
with 20 of 23 recommendations
13 15 and 16 OCIE
CF concurred with
Recommendations 20 and 21
Recommendations
with
and VII
and
management
the draft report dated
VI
Division
to CF
Cox
with both recommendations addressed
Recommendation 17
of Risk
Office
addressed
is
to
report responsible
recommendations
addressed to them and disagreed
concurred
the
to
are addressed to the
21
OCIE
In
them
18 2008 are
OIGs response to
August
addition
are included
to
in
Appendix VIII
included
in
Chairman
Should you have
contact
me
During
you and your
regarding this report please do not hesitate to
any questions
extended
staff
we
audit
this
appreciate the courtesy and
cooperation that
our auditors
to
Attachment
cc
Peter Uhlmann
Diego
Chief of Staff
Ruiz Executive
Schulz
William
Office
Bob Colby Deputy
Daniel Gallagher
Shelley Parratt
Michael
Deputy
Deputy
Macchiaroli
of Investment
Division
of Public
TM
Management
Affairs
Affairs
TM
Director
Director
Director
and Intergovernmental
of Legislative
Director
Executive
Office of General Counsel
Counsel
Andrew Donohue Director
John Nester Director Office
Office
Office of the
Director
General
Brian Cartwright
Chairmans
CF
Associate Director
TM
Mary Ann Gadziala Associate Director OCIE
Matthew Eichner Assistant Director TM
John Walsh
Thomas
Herb
Chief Counsel
McGowan
Brooks
Assistant Director
Lenox
William
Ethics
Denise Landers
Bishop
Juanita
Counsel
Counsel
Hamlett
Branch
Darlene
Pryor Management
Other
who
staff
participated
Investment
Report
Oversight
of
Bear
in
TM
Office
Legal
Rick Hillman Managing
sEcs
OCIE
Assistant Director
TM
of General Counsel
TM
Chief OCIE
Analyst Office of the
the
Director
audit
Director of Financial Markets
GAO
Steams and Related
Executive
Entities
No 446-A
111
The CSE Program
and Community
September 25 2008
The CSE Program Including Reviews Performed
on Bear Stearns
Summary
Executive
Background
week
the
During
10 2008
of March
Bear Stearns As
problems at The Bear Stearns Companies
Inc
spread Bear Steams was unable
secured
counterparties
14 2008
March
with
This
caused
JP Morgan
emergency
to obtain
severe
Co JP Morgan
Chase
result on Friday
provided
Bank
from the Federal Reserve
funding
liquidity
the rumors
financing from
problems As
liquidity
about
rumors spread
of
New
Bear Steams
York
FRBNY.2
on March 14
became apparent that the FRBNYs funding could not stop Bear Stearns
downward spiral As
that
would need to file
result Bear Steams concluded
to Congressional testimony3
According
2008
after
the markets closed
it
it
for bankruptcy
on March
protection
17 2008
unless another
firm
On Sunday
purchased
it
March 16 2008 before the Asian markets opened Bear Steams
JP Morgan was announced with financing support from the FRBNY In
May 2008 the sale was completed
sale to
Because
Bear Stearns had collapsed
holding companies
in
at
Securities and
the
Consolidated Supervised
Entity
CSE
the time of our fieldwork
program
there were six
Commissions Commission
Exchange
In
addition to Bear Stearns
six holding companies include or included
Goldman Sachs Group Inc
Co Merrill Lynch Lehman
Goldman Sachs Morgan Stanley Merrill Lynch
Brothers Holdings Inc Lehman Brothers Citigroup Inc and JP Morgan
On
Lehman
Brothers
announced
that
would
file
for
September 15 2008
these
it
and Bank
bankruptcy protection
Merrill
21 2008
on September
Federal
Reserve
the Board
approved
America announced
result the future of the
CSE
program
it
agreed
to acquire
difficulties
Finally
Federal Reserve System
statutory five-day antitrust waiting period
and Morgan
the Federal Reserve
with
that
serious financial
of Governors of the
pending
from Goldman Sachs
applications
companies
of
Both firms had experienced
Lynch.4
as
is
Stanley
new
their
to
become
bank
principal regulator
holding
As
uncertain
See Acronyms used in Appendix
The funding was from the Federal Reserve Bank of New York FRBNY through JP Morgan chase
JP Morgan to The Bear Steams companies Inc Bear Stearns because JP Morgan unlike Bear
Steams could borrow money from
Timothy
Geithner
chief Executive
Affairs
dated
The
SECs
Report
FRBNY
President and chief Executive
Officer of
on Turmoil
April
the
in
u.s
Bear
credit
co
Officer
FRBNY
and
Alan Schwartz
Steams before u.s Senate committee
Markets
Examining the Recent Actions
on
of
Banking
Federal
President and
Housing
Financial
and urban
Reaulators
2008
audit fieldwork
Oversight
of
was completed
Bear
prior to
Steams and Related
these events on
Entities
No 446-A
iv
September 15 2008
The CSE Program
September
25 2008
Of the seven
only
original
Bear
firms
five
CSE
Goldman Sachs
and Lehman Brothers which
Commission does
Morgan
was
created
In this
extends beyond
the
was designed
weakness in
allow the
to
CSE
company
CSE
becomes
unregulated
The CSE program
financial
unregulated
its
by applying
or operational
that might place
affiliates
supervision if
to
does not already have
obtaining an exemption from the standard
dealers are permitted to compute
for an
company consenting
ultimate holding
it
Commission
the
Commissions standard
the
using
capital
the broker-dealers
Commission
or
for
to the
itself
broker-dealers and other regulated entities at risk
exemption from computing
rule and
monitor
to
net capital
net capital
using
principal
rule the
main
activities
sales and trading clearance
regulator
was
with
highly leveraged
mortgage-backed
The Commission
liquidity
securities
than several
diversified
crisis
that
CSE
Bear Stearns
financing
of agency
of
derivatives
Bear Stearns
management
concentration
unprecedented
assets
in
and apparently
of confidence
crisis
but short-term secured
financing
market value
securities with
collapse
was due
to
well-capitalized
investment bank that experienced
unsecured
and
firms
lack of confidence
by
described Bear Stearns as
consisted
Le
The
with the
Bear Stearns had less capital and was less
of the other
stated
caused
brokerage
large exposure
securities
By
firms broker-
an alternative method
were investment banking
and asset
net capital
to group-wide
CSE
Commission designed the CSE program to be broadly consistent
Federal Reserves oversight of bank holding companies
Bear Stearns
Act of
Commission
capacity
company
holding
Commission
holding
States regulated
broker-dealer
basis
the
Exchange
supervise these broker-dealer
registered broker-dealer
broker-dealer to the
because
2004 by
in
the Securities
companies on
of the
The
Federal Reserve
to
affiliates
Lynch
Merrill
and JP Morgan
Citigroup Inc
the
amendments under
consolidated
Stanley
regulator
principal
voluntary program that
to rule
exercised direct oversight over
This program allows the Commission
supervision
United
regulator
principal
The CSE program is
Commission pursuant
holding
have
did not
not directly oversee
these firms have
934
Commission
firms the
Stearns
in
fully
denying
even
major
liquid
it
not
when the
only
collateral
excess of the funds
to
be
borrowed
source
Final
consolidated
Rule
Alternative
Suoervised
commission
21
June
Net
Entities
capital
Requirements
69 Fed Reg 34.428
for
Broker-Dealers
Securities
and
That Are Part
of
Exchange commission
2004
chttpllwww.sec.gov/ruleslfinal/34-49830.htm
Source
Turmoil
Before United
2008
SECs
Report
in
U.S
states
statement
Oversight
No 446-A
of
Credit
U.S
of
Bear
Markets
Examining
Senate Committee
Christopher
on
the
Recent Actions of Federal Financial Regulators
Housing and urban Affairs 110th cong April
Banking
cox Chairman commission
Steams and Related
Entities
The CSE Program
September 25 2008
Congressional
OIG
received
On
Request
Commissions
oversight
Commissions
Risk
Commissions
Division
regulating the
with
oversees
review
of
This
and
TMs
subject to the
noted that the
letter
TM
and Markets
of Trading
broker-dealers
largest
Grassley of the United
firms and broker-dealers
Assessment Program.7
requested
letter
CSE
of
of Inspector General
Finance requesting that the OiG analyze the
States Senate Committee on
The
2008 the Office
Member Charles
April
from Ranking
letter
was
responsible for
associated holding
their
oversight of the five
emphasis on Bear Stearns The
special
CSE
letter
companies
firms
directly
it
requested that
OIG analyze how the CSE program is run the adequacy of the
Commissions monitoring of Bear Stearns and make recommendations
the
to
improve the Commissions CSE program
The
United
OlG
provide
States
Senate
an update
Commissions
Committee on Finance
made
of findings
OIG conducted
response
In
also requested
letter
that the
report on the
previous audit
its
Assessment Program Broker-Dealer Risk
Broker-Dealer Risk
Assessment Program Report no 354
Audit Objectives
in
issued on August
2008 Congressional Request the
to the Commissions oversight of
the April
to
2002
13
two separate audits with regard
were to evaluate the
Commissions CSE program emphasizing the Commissions oversight of Bear
Steams and to determine whether improvements are needed in the
Bear Stearns and related
Commissions
This audits objectives
entities
CSE
monitoring of
firms and
administration
its
of the
CSE
program
The OlG performed
second audit on the Commissions Broker-Dealer Risk
Assessment Program to follow up on the current status of recommendations
made
in
OIGs
the
prior
report of the Risk
audit
Dealer Risk Assessment Program
and
to
Assessment
no 354
Report
examine the Broker-Dealer Risk Assessment
whether improvements are needed
program tracks the
program
broker-dealers
program
with the
in
several
broker-dealers
file
17h
TM
copy
resulting
documents
Bear Stearns
TM
letter
The U.S Senate committee
conduct an
pursue an
investigation
Report
report to
Oversight
No
of
Bear
its
to update
failed
is
into the
and
the rules
finalize
requirement
filing
in
Assessment
Risk
incumbent on
required firms to
has not yet determined whether the two remaining
attached
on
the
obligations
the failure of nearly one-third of the
to this
Finance
facts
letter
be issued on
report
also
in
full
file
in
requested
and circumstances
Enforcement Action against Bear
investigative
SECs
in
has
has not enforced
broker-dealers are obligated to
request
of this
TM
respects
holding
The Risk
underlying purpose of the Broker-Dealer
governing the program
13 2002
determine
that are part of
company structure and have at least $20 million in capital
Assessment Program report found that TM is not fulfilling
accordance
to
The Commissions Risk-Assessment
status of 146
filing
Program Broker-
issued on August
Steams
Form 17-H and
Appendix
that the
will
only
II
Office
surounding the
This issue
TM
of
Inspector
DIG
General
commissions decision
be addressed
in
not
to
an DIG
September 30 2008
Steams and Related
Entities
446-A
vi
The CSE Program
September
25 2008
conducts
an in-depth review
of the filings
146
for six of the
based on
customer accounts
number 446-B examining
Risk Assessment
Audit report
their
balances
free credit
TM
and
Commissions
the
and was issued on
10 recommendations
program contains
firms that
filing
determined are most significant
September 25 2008
Retention
Given the complexity of the subject mailer the OlG
of an Expert
Pete
an expert Albert
retained
Chair Professor of Finance
2006
He earned
Bachelor
this
audit
of Maryland faculty as the Charles
the Robert
at
assistance with
Kyle to provide
Professor Kyle joined the University
Smith School
of Science
degree
Smith
of Business in August
Mathematics from Davidson
in
in 1974
studied Philosophy and Economics at Oxford University as
Rhodes Scholar and completed his Ph.D in Economics at the University of
He was
Chicago in 1981
professor at Princeton Universitys Woodrow Wilson
College
from 1981-1987
School
Berkeley from 1987-1
Professor Kyle
the
at
992
renowned
is
University of Californias
and
Duke
at
expert on
many aspects
He
particular focus on market microstructure
research on such topics
and the
price volatility
contagion
2005
is
one
of the
Professor Kyle was elected
was
2006
member
board
also
He served as
his
career
he has worked
Fellow
papers
of the
the
after
addition
Revenue Service
Trading
to
the
TMs
audit Professor Kyle analyzed
memoranda on
the
CSE
pricing
in
2002
He
Task Force on Market
market crash
topics
for
1987
of
including the
Federal Reserve
During
several
Department
and the
Commission
particular focus on Bear Stearns
in
Appendix
Ill
data
documented
in
the
of this report
oversight of the
Professor Kyle reviewed
firms which
and reviewed
firms operations
stock
on finance
Professor Kyles Curriculum Vitae appears
In this
asset
Association from 2004-
Commission
the
in
of Justice the
Commodity Futures
theoretical
Presidential
consultant
government agencies
Internal
in
Econometric Society
of the
member
as
and
Auctions and Insider Trading Econometrica
cited
Mechanisms Brady Commission
with
trading market manipulation
of the American Finance
staff
in
significant
of market prices market liquidity
information content
mostly highly
markets
of capital
has conducted
as infornied speculative
His paper Continuous
Haas Business School
University from 1992-2006
CSE
TMs
CSE
TMs
firms with
internal
CSE
assessment of the
firms monthly and
quarterly
CSE
program filings
From
risk
this
information
management
firms filings
liquidity
SECs
Report
In
strategies
particular
and leverage
Oversight
of
Professor Kyle analyzed the
Bear
tolerance
for risk
firms financial
Professor Kyle analyzed Bear Stearns
ratios access
Steams and Related
to
secured
Entities
No 446-A
vii
data holdings
and assessed the adequacy of the
capital
and unsecured financing
The CSE Program
September
and
its
25 2008
compliance with industry and worldwide standards such as the Basel Standards.9
how
Professor Kyle analyzed
mortgage-backed
adequacy
of
traders and
the
including
of
funding
its
TM
how
Professor Kyle also examined
and
to
measure
risk
supervised Bear Stearns
two prominent hedge
its
scenarios
risk-management
its
the
relationship between
internal
funds that collapsed
in
summer of 2007
The CSE programs
Audit Conclusions and Results
in
the
process
management department
risk
operations
use of models
its
model review
its
Bear Stearns
supervised or oversaw
securities portfolio
models
its
TM
mission
goal
provides
pertinent part as follows
The regime
act quickly
CSE
intended
to
allow the
response
to
financial
is
in
company
holding
or
broker-dealers
unregulated
its
US
entities including
regulated
Commission
to
monitor for
weakness
or operational
and
in
that might place
affiliates
and foreign-registered
banks
and
or the broader financial system at risk.10
added
Thus
undisputable that
is
it
CSE
the
program
carry out
failed to
mission
its
under the Commission and the
of Bear Stearns because
oversight
in
its
CSE
programs watch-Bear Stearns suffered significant financial weaknesses and the
FRBNY needed to intervene during the week of March 10 2008 to prevent
harm
significant
to
broader
the
This audit was not intended
events
serious deficiencies
identified
improvements
The
Basel committee
of central
Germany
we found
Overall
number
of
banking supervision
consists
and accordingly
collapse
or direct connection
between
the
oversight of Bear Stearns and Bear Stearns
Programs
adequacy
system.11
complete assessment of the multitude of
be
to
that led to Bear Stearns
demonstrate any specific
have
financial
CSE
of
on Banking
worldwide
bank and
in
in
CSE
the
officials
broad supervisory
from
13
to
CSE
However we
of the
questions about the
as Bear Stearns was
Basel committee seeks
by developing
regulatory
collapse
that there are significant
Supervision
failure
program that warrant
program requirements
part
does not purport
to
improve the
member countries
quality
of
The Basel Committee
standards
canada France
Belgium
Kingdom and
The Basel committees supervisory standards are also often adopted by nonmember
Source Govemment Accountability Office
Bank Regulators Need to Improve Transparency
Japan
Italy
Luxembourg
the
Spain Sweden
Netherlands
United
Switzerland
United States
countries
and
Overcome
Impediments
to
Finalizing
the
Proposed Basel
Framework
II
No
Report
07-253 February
152007
10
SEC
Source
consolidated
Assessment
Overview and
Criteria
Supervision
of
Broker-Dealer
Holding
Companies
Program
Commission 16 Mar 2007
chttp//www.sec.gov/divisions/marketreg/cseoverview.htm
The Commission
Consolidated
achieving
and
its
Source
effect
Report
established
on
the
criteria
broader
the
CSE
none
financial
link
is
provided
of
Bear
Criteria
below
for
measuring
the
success
of
the
program While the CSE program may have been successful
of the
criteria
system
as
standards
stated
Consolidated Supervision
and Assessment
Oversight
criteria
Entity
SEC
Overview
SECs
its
established
Supervised
of
in
the
directly
related
CSE programs
Broker-Dealer
to the
goal
Holding
failure of
CSE
in
firm
statement
Companies Program
Commission 16 Mar 2007
Steams and Related
Entities
No 446-A
viii
The CSE Program
September
25 2008
of these
compliant with several
addition the
prior to
audit found
Bear Stearns
securities and
did not take
In
actions
addition the
to
The
regarding
with
these
limit
risk
example
CSE prior to
become
review
numerous specific
audit also identified
CSE program some
oversight of the
of the
inspection
not conduct
concerns
but
strictly
Bear
process
Bear Steams
Commissions
with the
are summarized as follows12
with
the
CSE programs capital
and
collapse raises questions
its
of these requirements
about the adequacy
TM
processes were not
CF did
comliant
requirements however
Although
standards
II
issued an order approving
of which
Bear Stearns was
liquidity
mortgage-backed
in
Basel
manner
timely
in
potential
of mortgage
of certain
the completion
of Corporation Finance
filing
In
red flags
factors
Commission
the
numerous
management
risk
the spirit
found that procedures and
audit
recent 10-K
of
concentration
its
shortcomings of
for
Further the Division
most
became aware
lack of compliance
adhered to as
Stearns to
collapse
leverage
securities high
but nonetheless collapsed
requirements
TM
that
CSE
was aware prior to Bear Steams becoming
Steams concentration
of mortgage securities was
firm that Bear
years and was beyond its internal limits and
portion of Bear Stearns mortgage securities e.g adjustable
increasing for several
that
mortgages
rate
TM
risk
represented
did not
make any
significant
efforts
to
of market
concentration
Bear Stearns
limit
mortgage
securities concentration
Prior to the
adoption
CSE program
the
of the
rule
amendments which created
broker-dealers affiliated
with
the
CSE
the
firms
were
required to either maintain
debt to-net capital
year of operation
Have
percent
with the
Formula
However
CSE
Stearns
12
We
have
collapse
see
13
no
specific
since our
Le
SECs
Report
in
the
recalculate
Oversight
to
after
their
first
the greater
debit items
of
computed
$250000
in
Determination of Reserve
for
or
two
accordance
Requirements
the
CSE
program did not require
firms Furthermore
leverage
scope
was high
indicating
did
not
whether any
include
despite
TM
TM made
of
these
determination
no
issues
of the
leverage
efforts
directly
cause
of
ratio limit
for
aware that Bear
being
to
require Bear
contributed
to
Bear
Steams
Bear stearns collapse
IV
Appendix
As discussed
15
Broker-Dealers
evidence
audit
of less than
not less than
net capital
of aggregate
for
the
ratio
or
of
and
Scope
and Methodology
determine
Bear
the
section
accuracy
Steams and Related
Bear
see
Appendix
Steams
Entities
No 446-A
ix
capital
IV we
did not
or liquidity
The CSE Program
independently
verify
amounts
September
25 2008
Stearns
reduce
to
describing
leverage
its
between
linkage
some
despite
and
leverage
liquidity
risk
TM
became aware that risk management of mortgages
Steams had numerous shortcomings including lack of
managers
risk
in
mortgage-backed
of timely formal review
of mortgage
proximity of risk
understaffing
and the
crisis
securities at various times
models
managers
lack
persistent
traders suggesting
to
models to
or unwillingness to update
inability
circumstances
changing
Bear
at
expertise by
turnover of key personnel during times of
of independence
lack
sources
authoritative
reflect
TM
knowledge
this
Notwithstanding
missed opportunities to push Bear Stearns aggressively to address
these
concerns
identified
There was no documentation of discussions
Stearns of scenarios
involving
accompanied
liquidity
TM
appeared
to
mortgage
crisis
exposure
to
require Rear
yet did not
standards and we did not
Bear Stearns
to
we
find
to
spirit
subprime
reduce
its
Basel
of certain
evidence
sufficient
TM
that
II
required
Board of Directors and
assess Bear Stearns
to
e.g
senior officials
although
Steams
the
comply with these standards
no actions
took
the types of risks
into
subprime loans
Bear Stearns was not compliant with the
TM
identify
with these mortgages that evolved
associated
and Bear
fundamental deterioration of the
by
mortgages themselves
TM
between
meltdown of mortgage market
the
found that
Chief Executive
this
Officer tolerance for risk
prudent and
is
necessary oversight
procedure
TM
authorized without an appropriate
CSE
the
firms internal
risk
audit staff to perform critical
management systems instead
auditors as required
In
June
2007
collapsed
raised
by the
about
some
in
Plan
some
the
significant
of Bear Stearns
week
of March
The Commission
use the alternative
including
completed
SECs
Report
Oversight
No 446-A
of
Bear
the
CSE program
significant
senior
after
TM
did
not
lack of
reassess
of Bear Stearns
the
collapse of the hedge
questions were once
managements
questions were
managements
However
component
CFP
involving
managed hedge funds
collapse
the crisis
strategy
Contingency Funding
and very
to this
work
audit
of the firms external
that created
of Bear Stearns
handling
the communication
funds
rule
two of Bear Stearns
Subsequent
involvement
delegation of authority the
raised about
again
handling of the
crisis
during
10 2008
issued four of the five Orders approving
capital
method
Bear Stearns before
and thus become
the inspection
firms to
CSEs
process
was
and
Steams and Related
Entities
The CSE Program
September
25 2008
CF
did not conduct
manner
timely
investors
deprived
used
Bear Stearns
The
make
to
securities
beneficial
to
Le
investment decisions
well-informed
Bear Stearns exposure
potentially
review
filing
was
In
the
addition
subprime mortgages
have
whether to
information
have
could
rumors that led
to dispel the
in
CF
that
of material information that they could
Bear Stearns
buy/sell
10-K
most recent
of this untimely review
effect
e.g
been
Bear Steams
to
collapse
We
Recommendations
should
Coxs
improve
significantly
Commissions oversight
the
that
see Appendix
CSE firms Chairman
26 recommendations
identified
Managements comments are attached
Our recommendations include
respectively
and
in
of
Appendix VI and VII
CSE
reassessment of guidelines and rules regarding the
capital
and
Taking
appropriate
levels
liquidity
measures
to
TM
ensure that
firms concentration
incorporates
firms
of securities
adequately
CSE
the
into
firms risk management systems and
programs assessment of
more aggressively prompts CSE firms to take appropriate actions
to
such risks
nhitigate
CSE programs
reassessment of the
ratio
CSE
the
Ensuring that
the review
and approval
performed
in
takes
risk
place
management
is
of
firms to help
risk
CSE
the
management
CSE
by the
CSE5
and
firms model review
by firms
areas where
in
firms
is
risk
thorough and timely manner
in
Being more skeptical
regulated
manner by
each
staff
are imposed on risk taking
that
leverage
for reviewing
specific criteria
process conducted
an independent
management
process
firms have
models used for pricing and
and approving
that
policy regarding
limits
approval
and
TM
limits
determines
adequate
not
CSE
firms
risk
them develop
models and working
additional
with
stress scenarios
have not already been contemplated as part of the prudential
regulation process
Greater involvement
for
on the part of
TM
in
action
formulating
variety of stress or disaster scenarios
even
if
the
plans
plans are
informal
Taking
steps to ensure that
occasion
by using
for
management
Report
Oversight
No
of
Bear
the
mark
disputes do not
firms to inflate the
inconsistent
Encouraging
SECs
CSE
CSE
data
in
Steams and Related
combined
provide
capital
an
of two firms
marks
firms to present Value at Risk
useful
Entities
446-A
xi
manner which
The CSE Program
is
and
other risk
consistent with
how
September 25 2008
CSE
the
to
firms use the information
be applied
Supervised
Entities
Basel
with
take
assets and appropriate capital
that the Consolidated
II
appropriate
factors
risk
desks
consistently to individual
Ensuring in accordance
and allows
internally
deductions for
capital
illiquid
deductions for stressed repos
especially stressed repos where
as
securities are posted
illiquid
collateral
Greater discussion of
actions
risk
CSE
of
with
the
CSE
the
the
desires of the
management
and senior
compliance
auditors to review
firms Boards of
better understand whether the
to
firms staff are consistent with
Boards of Directors
Requiring
CSE
tolerance with the
and senior management
Directors
existing rule that requires external
management
firms risk
or seek Commission approval
in
Administrative Procedures Act
accordance
with
from the current
deviation
for this
control systems
the
rules requirement
Ensuring that reviews
CSE
firms
of
CFP
includes an assessment
firms internal and external communication
formal automated
Developing
by the monitoring
identified
process
staff to
to
of
strategies
track
material issues
ensure they are adequately
resolved
Ensuring that they complete
process
CSE
additional
firms the
firms inspection
phases of
all
recommending
before
that the
authority
to
Commission
allow any
use the alternative
capital
method
Compliance Inspections
ORA
Assessment
Risk
The development by CF
timely and tracking
creation
Division
and
of internal guidelines
for
reviewing
and monitoring compliance with
Task Force
of
led by
Management
of Investment
analysis of large firms with
amounts
among
its
ORA
customer accounts
of customer funds and
to
report consists
the Division
addressed
of Trading
to
the
Office
of 26
SECs
Report
that hold
No
of
Bear
significant
have unregulated entities
TM
Recommendations
of Compliance Inspections and
is
also addressed to the Office
Recommendations 20 and
Oversight
the
perform an
to
firms on
recommendations that are addressed primarily to
and Markets
and Recommendation 19
ORA
TM
basis
consolidated
final
filings
internal
with staff from
and OCIE
determine the costs and benefits of supervising these
The
of
and
guidelines
The
TM OF the Office of
Examination OCIE and the Office
collaboration efforts
Improving
Steams and
Related
21
of Risk
are addressed to the
Entities
446-A
xii
The CSE Program
18 and 25 are also
Examinations
OCIE
Assessment
Division
of
September
25 2008
Corporation
Finance
Recommendation 22
In
response
out of 26
to
them and
with
Report
Oversight
of
Recommendation 17
addressed
the draft report
both
Recommendation
sEcs
is
recommendations
addressed
concurred
to
CF
Bear
to
Chairman
is
to
CF
and
TM
and
Cox
management officials agreed with 21
concurred with 20 of 23 recommendations
responsible
TM
disagreed
with
13 15 and 16 OCIE
them CF concurred with
Recommendations 20 and 21
Recommendations
recommendations addressed
17
addressed
but disagreed with
Steams and Related
Entities
No 446A
xlii
to
The CSE Program
September
25 2008
TABLE OF CONTENTS
Executive
Summary
iv
Table of Contents
Background
xiv
and Objectives
Findings and
Recommendations
10
The CSE
Requirements But The
Collapse Of Bear Stearns Raises Questions About The
Adequacy Of These Requirements
Bear Stearns
Finding
Programs
Was
And
Capital Ratio
Compliant With
Liquidity
Adequacy
Increased
of Capital
Levels
Access
Secured
to
10
Financing
11
Recommendation
13
14
Liquidity
R6commendation
TM
Finding
Risks That
17
Did Not Adequately
Impact The
Overall
Address
Several
Of The
Effectiveness
Significant
CSE
Program
17
Concentration
of Assets
17
Recommendation
18
Leverage
19
Recommendation
20
Bear Stearns
Management
Mortgage
Model
Review
Staffing
Backed
Process
and
Were Inadequate
In
Risk
The Area Of
Securities
20
Recommendation
Risk
24
Scenarios
24
Recommendation
27
Recommendation
27
Non-compliance
With
Basel
27
II
Mark Disputes
27
Recommendation
29
Inconsistent
VaR Numbers
29
Recommendation
SECs
Report
Oversight
10
10
Capital
of
Bear Stearns and
Related
29
Entities
The CSE Program
No 446-A
xiv
September
25 2008
Bear Stearns Capital Requirements
Assets and Stressed Repos Require
for Illiquid
Careful
29
Oversight
Recommendation
Tolerance
33
for Risk
Recommendation
TM
Finding
10
33
33
11
Without
Explicit
Authority Allowed
Firms Internal Auditors To Perform
Recommendation 12
TM
Finding
Did
Not Review
Of Bear Stearns
Component
The Collapse Of Two Of Its
Recommendation 13
TMs
Finding
Monitoring
Critical
The
CSE
Work
34
35
The
Communication
Strategy
Funding Plan After
Contingency
Managed Hedge Funds
36
Staff
Do
Not Adequately Track
37
Material Issues
Formal Automated
Develop
Recommendation
Follow-up
35
Tracking
Process
37
14
38
on Prior OCIE Findings
Recommendation
38
15
40
The Commissions Orders Allowing Firms Including
Use The Alternative Capital Method Were
Process Was
Generally Approved Before The Inspection
Finding
Bear Stearns To
40
Completed
Recommendation
16
41
Between TM and Other Commission
Divisions/Offices
Should Be Significantly Improved
Collaboration with CF
Finding
Collaboration
Recommendation
17
Collaboration with
Recommendation
Recommendation
Finding
Was
SECs
Report
Oversight
CFs
Filing
OCIE
Bear Stearns and
Related
42
43
ORA
43
19
43
Review
Not Timely
Review of Bear Stearns
of
41
42
18
Collaboration with
41
Entities
No 446-A
xv
Of Bear Stearns 2006
10-K
44
10-K
44
Filing
The CSE Program
September 25 2008
20.45
Recommendation
Bear Stearns
Response
Recommendation 21
Certain
Finding
to
CFs Comment
10
Pose
Firms May
Systemic Risk
On
Consolidated Basis
TM
The
Involving
45
46
Because They Are Not Supervised
Recommendation 22
Finding
Letter
46
47
Should Address Organizational
Future Of The CSE Program
Issues
48
Changes to the CSE Program
Recommendation 23
48
Program Staffing
49
Recommendation
49
24
50
Manual
Ethics
50
Recommendation
Coordination
25
50
with Other Regulators
Recommendation
50
26
51
Appendices
Acronyms
Appendix
Appendix
II
Appendix
III
52
Curriculum Vitae
Appendix IV
Appendix
70
76
Coxs Comments
Management Comments
OIG Response
Appendix
Comments
Appendix IX
Appendix
of
56
Chairman
VIII
Oversight
Pete Kyle
Scope and Methodology
of Recommendations
Appendix VII
Report
OIG
expert Albert
List
Appendix VI
SEcs
54
Congressional Audit Request
Bear
Gross Leverage
to
Chairman Cox
81
83
Management
115
119
Ratios
120
Criteria
Steams and Related
Entities
No 446-A
xvi
The CSE Program
September
25 2008
APPENDIX
Background and Objectives
Background
General
is
Background
responsible
Consolidated Supervised
programs The
the
conducting
are directly
of Financial
inspections
includes the
16
During our
as
fieldwork
broker-dealers
including
The
This office
in
uses
has
that
TM
following
for
are
offices
both
were
regional
net
the
Office
For purposes
purposes
of this
audit
Entity
CSE
rule18
capital
Compliance
of
report
of this audit
OCIE
report
we
also
offices
Supervised
whose
firms
principal
Commission Goldman Sachs Group Inc Lehman Brothers
Holdings Inc Lehman Brothers Merrill Lynch
Co Inc and Morgan Stanley On September 15
regulator
discussed
below was
for
Consolidated
four
e.g
regulations
examinations
addition
In
responsible for
is
inspections however
term
the
uses the term
Commissions
the
there
responsibility
TM
OCIE
to refer to
staff
Inspection
audit
OCIE
Examinations
Commission Commission
investment banks.17
Responsibility
and Examinations
use the term
the
Risk Assessment
and Broker-Dealer
and Exchange
the financial
See Acronyms used in Appendix
The Division of Trading and Markets
Inspections
includes administering
these programs
in
administering
15
Le
firms16
involved
Office
14
CSE
of broker-dealers
inspections15
CSE
with
affiliated
which
of Compliance Inspections and
Office
TM14
Division of Trading and Markets
broker-dealers
Entity
within the Securities
responsibility
The
Information
regulating
for
the
2008 Lehman Brothers announced
that
announced
Merrill
that
it
agreed
to
acquire
would
it
for
file
bankruptcy
Co
Lynch
Bank
and
protection
On September21 2008
Inc
America
of
the Federal
approved pending
statutory five-day antitrust waiting
period applications from Goldman
Sachs and Morgan Stanley to become bank holding companies The Bear Steams Companies Inc
CSE firm approved in November 2005 until its collapse In addition JP
Bear Steams was also
Co JP Morgan and Citigroup Inc have been approved to use the altemative method
Morgan Chase
Reserve
for their
broker-dealer
capital
requirements
Reserve is their principal
Commission is responsible for the
Federal
but
oversight
Board
the
te
regulator
of
Govemors
for the
responsible
is
As
broker-dealers
of their
of
to
Citigroup
17
In
2007
in
the Federal Reserve
response
Engaged
Agencies
to
in
Collaboration Report
Consolidated
07-154
Scope and Methodology
transferred
the
to
avoid
Govemment
March
for
or inconsistent
GAO
Office
Can Strengthen
Supervision
15 2007 as discussed
see Appendix
responsibility
duplicative
Accountability
conducting
Chairman
the
Ill
inspections
of
in
in
approximately
18
The
and
net
to
claims
Capital
5000
capital
creditors
satisfy
OCIE has oversight
broker-dealers
inspections
and
by
rule
The
Financial
broker-dealers
focuses
on
requiring that
promptly
Prior
Measurement
Audit Coverage
consultation
the consolidated
liquidity
and
GAO
responsibility
in
is
the
entity
designed
have
July
FINRA
to
protect
sufficient
20 19g8
liquid
Capital
is
and
section
of
the
Commissioners
from OCIE to TM
other
with the
CSEs
on the
responsibility
these broker-dealers
United States
Report Risk-Based
No GGD-98-153
of
Regulatory Authority
registered
broker-dealers
Source
Risk Report
Industry
and
JP Morgan and
Market Regulation
Financial
SRO
periodic
the
regulation
report
OCIE retained within the Commission responsibility for conducting inspections
have the primary inspection
dealers The Self Regulatory Organizations
registered
but
Securities
of
entity
Performance
the
entity
result the
Exchange Commission Commission defers oversight of the consolidated
System
the Federal Reserve
consolidated
broker-
for the
and conducts
the primary
regulator
customers
counterparties
of
U.S.
securities
resources
Regulatorq
on hand
and
at
all
Industry
times
to
Approaches
These
and customer protection19
customers and
This
institutions
financial
Securities Investor
also oversees
office
the
and has approximately
Corporation
Protection
to protect
regulations are intended
nine
staff.2
Office of Prudential Supervision and
as monitors
firm They perform
The
and finance
The
Risk Analysis
teams
in
referred to
staff
CSE
each
of three to review
work mainly through periodic meetings and
their
CSE
informal discussions with
financial filings
work
this office
in
The
staff
staff
have backgrounds
staff
and expertise
in
market
credit
in
CSE
also review
economics
required
accounting
or liquidity risk
Approximately
13 individuals comprise the staff
CSE
Office of
inspections on the
both
Washington
CSE Program
Securities and
In
program
2004
Act of 193421 which
Exchange
extends
beyond
was designed
weakness in
to
CSE
U.S
States
company
holding
CSE
becomes
broker-dealer
or
the
by applying
for
and
to
voluntary
to the
financial
CSE
broker-
CSE
program
or operational
affiliates
that might place
other regulated entities
the
exemption from the Commissions standard net
the
unregulated
The
itself
in
Commission
capacity
In this
company
the
located
amendments under
unregulated
its
broker-dealers
regulated
rule
to supervise certain
monitor
to
who are
staff
registered broker-dealer
the
Commission
allow the
seven
basis
consolidated
for conducting
responsible
created
Commission
broker-dealer and the holding
of the
affiliates
is
Commission adopted
the
This program allows the
supervision
office
CSE firms They have
D.C and New York
dealer holding companies on
United
This
Inspections
Commission
at
risk
for an
rule22 and the broker-
capital
dealers ultimate holding company consenting to group-wide Commission
supervision
if
does not already have
it
exemption from the standard
permitted
19The
compute
to
customer
net capital
protection rule
principal
net capital
20
The
of
Securities
protect
23
to
Investor
customers
confidence
Act
broker-dealers
pay
Source
the
in
is designed
to
claims
Rule
Final
Act
Protection
See
Alternative
Supervised
of
resulting
markets
securities
an
ensure
that
customer
property
securities
and funds
in
the
adequately
from losses
investor
Consolidated
is
obtaining
firms broker-dealers are
an alternative method.23
using
safeguarded
Source GAO Report Risk-Based capital Regulatory and
Report No GGD-98-1 53 July 20 1998
custody
By
regulator
CSE
rule the
15
Net
Entities
1970
from
The
u.s.c
Approaches
to capital
78aaa et seq as amended
broker-dealers
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failure
thereby
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and Risk
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to
investor
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78ccc
u.s.c
Capital
69
15
Industry
Requirements
Reg 34.428
Fed
for
Broker-Dealers
Commission
21
That Are Part
of
June 2004
chttp//www.sec.gov/rules/finalf34-49830.htm
22
See 17 C.F.R
23
The
alternative
2401 5c3-1
capital
dealers operating
capital levels
SECs
Report
is
based on the type
Oversight
No
method
446-A
of
based
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under the standard net
Bear
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of securities
Steams and Related
rule
activities
Entities
models and scenario
must meet
certain
they conduct
ratios
See
The CSE Program
17
testing
and
while
maintain
broker-
minimum net
C.F.R 240.1 5c3-1
September
a7
25 2008
The Commission designed
Board
oversight of bank
companies
Second
The CSE
liquidity
exemption from the net
TM
includes
process
application
CSE
the design of the
as
an external
to
reflects
risk
the
the
and
critical
for
provider.24
liquidity
firms application25
reviewing
rule and makes
capital
regime
critical
market environments
all
in
do not have access
that
be broadly consistent with the
mark-to-market accounting
importance of maintaining adequate
holding
to
Systems Federal Reserve
However the CSE program reflects
companies
holding
control
program
Reserve
Federal
reliance of securities firms on
governance
USE
the
of Governors of the
for an
recommendation to the
Commission Approval of the firms application is contingent on the firm agreeing
to group-wide Commission supervision of the consolidated entity including
unregulated affiliates
USE
addition
the firm does not already have
if
an
Calculate
group-wide capital
international
standards adopted
an overall Basel
ratio29
capital
of not
percent well-capitalized standard
notify
34Source
Sirri
25
The
of
risk
27
TM
the
holding
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be violated30
or
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10
The CSE
companies
Notice
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10
the
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Urban
Loan companies
of Industrial
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110th
cong October
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Senate
statement
of Erik
management
whose purpose is to verify the information the
assess the adequacy of the implementation
inspections
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firms
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Program Description
commission
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commission
June
The
Holding
Basel Committee
United States
to
Source
2008
are
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for
Risk
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of
Bank
Basel Committee seeks
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Regulators
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Need
Framework
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TM
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information
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quality
of
The Basel committee
to
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Report
No
of
Bear
divided
by
this
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Transparency
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and
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07-253 February 15 2007
Program
Description
.htm
Commission
June
added
weighted assets
occurred
In
our opinion
TM
acted reasonably
include
and
Commission
446-A
to
standards
member countries Belgium Canada France
Company Supervision
instance where
Housing and
Oversight
No
ratio
one
Management
Banking
Report
GAO
Holding
aware
Sources
SECs
part
chttp//www.sec.gov/divisions/marketreg/hcsupervision
The Basel
We
in
regulatory
SEC
Source
Supervision
Banking Supervision
the Proposed Basel
Finalizing
company
Japan Luxembourg the Netherlands Spain Sweden Switzerland United Kingdom and
The Basel Committees supervisory standards are also often adopted by nonmember
Italy
countries
on
worldwide
bank and
of central
Germany
31
bank
2008 httpIlwww.sec.govdivisionslmarketreg/hcsupervision.htm
Source SEC
Holding company Supervision Program Description
2008 http//www.sec.gov/divisions/marketreg/hcsupervision.htm
consists
29
less than the Federal
file
to
likely
are required to maintain
below $5 billion
process and
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28
is
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SEC
Source
26
Housing and
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is
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Regulation
Banking
on
Director
ratio
capital
broker-dealer falls
Examining
committee
The CSEs
for
e.g
Commission
the
control
adequacy measure consistent with the
by the Basel Committee on Banking
Basel Standards.28
Supervision
percent
management
internal risk
group
the affiliate
of the
In
regulator
firms must agree to
Maintain and document
must
principal
its
Implications
Urban
Affairs
for
110th
Systemic Risk Before
U.S Senate Committee
Cong June 19 2008
statement
of Erik
Sirri
on
Director
and
Steams and Related
Entities
The CSE Program
September
25 2008
Maintain
cash outflows
expected
its
where access
unsecured
to
in
regulated
with
weakness
elsewhere
regulators
permit
withdrawal
Consent
to
of
the
environment
period of at least
is
any assets
that
company
holding
based
structure
where those
books
of the
company
company
company and
Make
those
to
the
consolidated
Commission
the
or any of
available
and
entitx
of the
holding
necessary
is
the ultimate holding
and
regulators for
inspection reports of principal
Commission
that are not subject to
affiliates
within
risks
material affiliates
its
and
information about the
material affiliates that
its
and operations
financial
not
do not have principal regulators
affiliates
and make available
evaluate
to
would
capital
ultimate holding
ultimate holding
on the
tightening of market
including
relevant foreign jurisdictions
Regularly report on the financial and operational condition
company
held
for use outside of the entity to deal
U.S and
the
in
in
planning
resources
financial
for
Commission examination
records of the
affiliates
of this liquidity
the stress event
assumption that during
liquidity
not available
is
are unavailable
entity
sufficient
stressed liquidity
in
funding
one year Another premise
its
and
sufficient stand-alone liquidity
meet
to
inspection
The
firms agreed
to
consolidated
treatment under the alternative
European Unions
EU
because
supervision
method
of the preferential capital
Conglomerates
U.S
by
supervision
regulator or face
of
required that affiliates
Directive
broker-dealers demonstrate that they were
registered
The
and intemational requirements
significant
U.S
subject to consolidated
on
restrictions
their
European
operations.36
Final
Rule
Net
Alternative
Supervised
Entities
69
capital
Fed
Requirements
Reg 34-425
Broker-Dealers
for
Commission
21
That Are Part
of
consolidated
June 2004
chttpI/www.sec.gov/ruleslflnall34-49830.htm
32
Source
33
Management and
Risk
Banking
Housing and Urban
commission
Source SEC
2008
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2008
Source
2008
Holding
SEC
Holding
SEC
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the
and
of
of
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U.S Senate
statement
of Erik
Program Description
Supervision
Company Supervision
adequacy
equivalent
in
the
in
Part of
EU
Program Description
Program Description
EU
the
Unionj consolidated
rules imposed
either
EU
at
the
intra-group
U.S
supervision
December2002
Dealers That Are
Report
capital
company
16
final
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controls
institution
SECs
Risk Before
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committee on
Sirri
Director
of
TM
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commission
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Commission
June
chttp//www.sec.goy/divisions/marketreg/hcsupervision.htm
demonstration
2004
for
cong June 19 2008
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to
Council
Implications
chttp//www.sec.govldivisions/marketreglhcsupervision.htm
quantitative
internal
its
Affairs 110th
level
securities
Directive
Consolidated
Final
No 446-A
of
Bear
2002/87/EC
Entities
Entities
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have
holding
69
Net
Fed
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company
concentration
expressed
capital
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Rule Altemative
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Steams and Related
and
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http//www.sec.govlrules/final/34-49830.htmP42l
Oversight
the
transactions
may be subject
Source
of
charges
European
Capital
The CSE Program
that
be required
Parliament
Reguirements
Reg 34.428
series of
Without
concems
or
of
regarding firms
and
for
an
to
affiliate
form
of the
Broker-
Commission
21
June
September 25 2008
Loans
Mortgage
who
individuals
Many
history
more
of these loans
loan
increase
improved
credit
ensuing months
the
value
was
of
Banks
backed
with
2007
Steams
about
Morgan
Chase
Sources
2008
Bank
New
of
2008
in
Turmoil
in
definitions
Steams gross leverage
Depending
subprime
Bear
pledge
SECs
Report
on the
direct
446-A
of
ratio
Examining
because
collapsed
Bear Steams faced
March
result on
the
of
severe
14 2008 JP
the
must be valued
securities
at
fair
Housing
President
Examining
and
Urban
Affairs
and Chief Executive
110th
congress
April
Federal Reserve
Officer
the
Recent Actions of Federal Rnancial
Housing
and
Urban
Affairs
ut
Regulators
Congress
April
Dimon Chairman and Chief Executive Officer JP Morgan and
Markets
Examining the Recent Actions of Federal Financial Regulators
page
Reoort
leverage
simple
was about 33-1
to classify
However
exposure
supports
Bear
less diversified
Bear Steams with emergency
Principles
on Banking
Markets
used
varied
of collateral
Oversight
No
As
provided
Accounting
Markets
Annual
of
definition
mortgages
Steams
financing
Housing and
Alan Schwartz President and
of
2006 Bear Steams
many
and was
capital
highly
mortgage-
in
Jamie
of
Credit
statement
of assets
FRBNY
Credit
U.S
sales and trading
derivatives
year later during the week of March 10
Due to Bear
at Bear Steams
U.S Senate Committee on Banking
Before
are
14
Timothy Geithner
of
York
statement
main
Its
include
Credit
U.S
In
of dollars
problems
Before
Source
U.S
billions
market accounting
to
statement
Turmoil
2008
in
to
decrease
Bear Stearns was
hedge funds
managed
2008
Morgan
U.S Senate committee
Before
Le
Nearly
Generally Accepted
mark
for this information
Turmoil
40
Co JP
with
to
industry wrote-down
concentration
over secured
liquidity
he
the
securities
securities.37
liquidity
problems on March
accordance
into
firms
lenders not rolling
market value
refinance
home values and
these loans
mortgage securities
securities and
two of Bear Stearns
rumors spread
to
as the securitization process
Bear Steams also had less
subprime mortgage losses.42
2008
able
had two registered broker-dealers
that
CSE
These
theory behind
mortgage loan defaults started
of the
services
large exposure
than several of the
in
or credit
The Bear Stearns Companies Inc Bear Stearns
Collapse.38
securities.41
June
growth
converted
known
decrease
to
the financial
company
increased
of the
rating
brokerage and asset management.39
leveraged40
42
interest only
were investment banking
clearance
41
were
types of mortgage
all
holding
activities
In
had teaser rates and/or
market value
the
causing
Bear Stearns
In
income
subprime mortgages The
was that the homeowner would be
loans
risky
Once home values began
in
lenders offered mortgages to
e.g
sold the securities to other firms
the
2004
normal qualifications
few years because
in
individuals
and
late
risky loans are referred to as
approving these
the
around
Beginning
did not meet the
to
these
it
Urban
Affairs
Chief Executive
110th
Officer
Congress
Bear
32
definition
of
leverage
is
assets
divided
April
Steams
by
capital
Bear
See Appendix IX
mortgage as
clearly
had
large
subprime Bear Steams
exposure
to
mortgage
exposure
securities
to
overall
hedge funds was minimal
secured financing
Steams and Related
Entities
The CSE Program
September 25 2008
According
funding.44
14 2008
March
to
purchased
announced
As
spiral
On
it.46
FRBNYs
apparent that
bankruptcy
for
file
Congressional testimony45 after the markets closed
became
it
Steams downward
need
to
result Bear Stearns concluded
on March
protection
March
with financing
17 2008
sale to
from the
In
FRBNY
that
it
would
unless another firm
16 2008 Bear Stearns
support
on
not stop Bear
funding could
JP Morgan was
May 2008
the
sale
was
completed
the Senate Committee on Banking
Housing and
2008 Chairman Christopher Cox stated that Bear
Steams collapse was due to
crisis caused
lack of confidence.47
liquidity
by
Chairman Cox described Bear Stearns collapse as
run on the bank48 which
In
before
testimony given
Urban
Affairs on April
occurred
te
exceptionally fast and
the
credit crisis
an already distressed market environment
in
Chairman Cox
Specifically
as follows
testified
What happened to Bear Stearns during the week of March 10th
For the first time
was likewise unprecedented
major investment
bank that was well-capitalized and apparently fully liquid
experienced
of confidence
crisis
that denied
but short-term secured
financing
consisted
collateral
of agency
excess of the funds
to
brokerage
decisions
clients
moved
their
by counterparties
Bear Stearns
transact with
clients and
services
Prime
These
cash balances elsewhere
and lenders
clients
in
clearing
tum
influenced
lenders to also reduce
to
in
would not
Counterparties
and
services
the
market value
securities with
be borrowed
provide securities lending
not only unsecured
it
even when
financing
no longer
other counterparties
their exposure to Bear
Stearns.49
The
was from FRBNV through JP Morgan
funding
money from FRBNY
Source Turmoil in u.s
Before
statements
Source
Turmoil
Securities
110th
47
US
Source
Before
of
commission
statement
Credit
christopher
in
u.s
Markets
of
Markets
of
Turmoil
in
U.S
of
Oversight
No
446-A
of
Affairs
110th
Officer
FRBNY
congress
April
32008
and Alan Schwartz
the Regulation
Examining
Erik Sirri
of Investment
U.S Senate on Securities
Banks by the
and Investment
Insurance
of TM commission
Director
the
Housing and
Urban
Affairs
110th
cong
April
2008
Markets
Examining
the
Housing
Recent Actions of Federal
and Urban
Affairs
110th
Financial
cong April
Regulators
2008
cox chairman commission
Credit
christopher
and Urban
cox chairman commission
Credit
christopher
could borrow
Steams
Examining
on Banking
the
Steams because JP Morgan
chief Executive
Before the
Markets
Examining
statement
Report
115
and
Bear
Officer
Bear
Housing
President
Credit
Senate committee
Turmoil
Source
SECs
2008
in
Examining
on Banking
US. Senate Committee on Banking
statement
Before
u.s
and Exchange
Turmoil
statement
48
in the
cong May
Source
Before
Markets
Timothy Geithner
of
and chief Executive
President
46
Credit
U.S Senate committee
to
the
Housing
and Urban
Affairs
cong April
2008
Cox Chairman Commission
Bear Stearns
and
Related
Entities
The CSE Program
September 25 2008
and
company
and
level
during the
hedge funds collapsed
Bear
there
was adequate capital
by
Stearns
TM
provided to
week
Bear Stearns
at
10 2008
of March
Furthermore according
its
The Commission
to
the
stated
billion
reviewed
May
since
levels
liquidity
secured
that
possibility
become
could
requirement.51
liquidity
Bear Stearns had
CSE
significantly
program nor any regulatory model
considered that
be unavailable for
backed
completely unavailable
deterioration of secured
become
terms could
financing
even when
financing
financing could
less favorable and that
CSE
program only
e.g
occur
unsecured
that
funding could
least one year
at
standards applicable
updated
to
Congressional
make
of Representatives
CSE
the
Supervision
the
management
At
program mandatory.55
24 2008
July
aftermath of
strengthening
liquidity
the Committee
before
hearing
risks on
liquidity
legislation to
to
guidance
the
In
Supported the work of the Basel Committee on Banking
regarding their planned
House
considered
by high-quality
Instead the
The Commissions Response to Bear Stearns Collapse
Bear Stearns collapse the Commission has
Supported
and
prior to
the Basel Standards53 used by commercial or investment banks
collateral
data
holding
2007.52
neither the
that
the
at
capital
to
Commission stated that
addition the
In
we
data
to
According
two registered broker-dealers
Bear Stearns was compliant with the $5
increased
monitored Bear Stearns
Bear Stearns
daily since
liquidity
TM
Commission press release5
According to
on Financial
recent
Services
stated
50
Source
Statement
of
SEC
Division of
Trading and
Markets
Regarding
The Bear Steams Companies
Commission 14 March 2008 httpIJwww.sec.govlnewslpressl2008/2008-44.htm
The Chairman also
made similar statements in his letter to the Basel Committee regarding liquidity management
and
testimony Turmoil in U.S Credit Market Examining the Recent Actions of Federal Financial Regulators
us
Before
statement
Senate
As discussed
i.e
52
Le
to
week
and Methodology
determine
Chairman
Cox
CSE
firms
operate under
Chairman
Cox
of this information
Risk
Management
TM
110th
Cong
April
32008
section
compared
see
high
$7.6
to
Basel Committee
Appendix
Steams
Bear
accuracy
in
IV we
of $21
billion
in
independently
did not
capital or liquidity
verify
amounts
liquidity
in
early
2008
March
May 2007 according to TM data
Support of New Guidance on Liquidity Management
billion
in
the
Basel
II
standards
Basel Committee
in
Support
of
New Guidance on
Liquidity
Management
httpI/www.sec.gov/news/press/2008/2008-48.htm
include
and
Banking Housing and
of
Affairs
httpI/www.sec.govlnews/press/200812008-48.htm
Letter to
Commission 14 March 2008
Sources
10
Letter to
Commission 14 March 2008
Source
the
March
of
and urban
Housing
Commission Bear steams had
the
before the
Source
and
on Banking
Cox Chairman Commission
Scope
the
in
recalculate
According
Committee
Christopher
of
its
Implications
Urban
Affairs
Systemic
for
110th
Risk Before
U.S Senate Committee
Cong June 19 2008
statement
of Erik
on
Sirri
Director
Commission and
and
Systemic
Risk
Financial
Services
the
Financial
1101h
Markets
Before
U.S House
Cong July 24 2008 statement
of
of
Representatives
Christopher
Committee
on
Cox Chairman
Commission
SECs
Report
Oversight
No 446-A
of
Bear
Steams and Related
Entities
The CSE Program
September 25 2008
The mandatory
consolidated
investment banks should
with
specific authorities
to
and
set recordkeeping
standards
set risk
standards
apply progressively
adequacy
enforce
conduct
process
whether
examinations
for
handling
and generally
extraordinary
institution-specific
market events
or liquidity
future legislation should
Any
to
control
share information with other
rules and
the
capital
if
internal
significant
requiring divestiture of lines
including
falls
regulators
management and
more
on operations
of business
liquidity
and reporting
standards
restrictions
these
company
the holding
authority to set capital
include
for
SEC
the
provide
several
Broadly with respect
regime
supervision
problems
or connected
needed
provide
also establish
with
broader
predictability
and
certainty.56
Requested
dedicated
CSE
increased
from about 25
staffing
CSE
Consulted with the
plans
Congressional funding
the
Specifically
to
40
CSE
levels
their liquidity
lengthen
the terms of their secured and unsecured
their risk
new
increase
Source
57
Source
Risk
Systemic
Services
Financial
Risk
Banking
their
and
10th
and
Management
and
Housing
the
cong
Urban
July
its
chairman commission
Source Turmoil in u.s credit Market
U.S senate committee
statement
of
Source
Christopher
Turmoil
Securities
in the
Turmoil
Securities
110th
61
Financial
SECs
Report
u.s
Credit
Representatives
U.S Senate
Systemic Risk Before
statement
Recent Actions
the
Housing
and
Urban
of
Risk
Services
of
committee
and
statement
the
llO cong
Bear
on
Cox chairman commission
of
Edk
committee on
Director
Sirri
Federal Financial
Affairs
110th
cong
of
TM
Regulators
April
Examining
Before
the
the
Regulation of Investment
Banks by
Insurance
Insurance
and
32008
Before
of Erik
the
Sini
Director
Financial Markets Before
July
24 2008
Steams and Related
TM
of
the
and Investment
commission
U.S House
statement
Entities
of
the
Investment
2008 statement of Erik Sin Director of TM commission
u.s Credit Markets
Examining the Regulation of Investment Banks by
Systemic
No 446-A
Examining
Banking
of
Christopher
cong June 19 2008
Markets
and Exchange commission
Oversight
of
in the
cong May 72008
Source
U.S House
cox Chairman Commission
and Exchange commission
llo Cong May
60
on
110th
markets
and liquidity
of their capital
statement
for
Implications
Affairs
Before the
Markets Before
24 2008
for raising
plans
equity and long-term debt
the
public disclosures
Financial
financing
models
and
practices
by accessing
capital
funding
firms to
discuss their long-term funding plans including
56
e.g
situation
with the
increase
review
program and
people
firms on their liquidity
Commission worked
the
for
of
christopher
The CSE Program
Representatives
committee
on
cox Chairman Commission
September 25 2008
FRBNY
Invited
examiners
firms are managing their
July 2008 the
Memorandum of
In
information
to
CSE
reviewthe
funding
Commission and the
Federal Reserve
MOU
Understanding
and how
firms funding
the
and
involving
on
agreed
and
coordination
sharing.64
Objectives
As
result of the collapse of Bear Stearns
Congressional
in
March
in
2008 we
received
Commissions CSE Program
Commissions Broker-Dealer Risk Assessment
request to perform this audit of the
addition to an audit
of the
Program see Appendix II
The
of this audit were to evaluate
objectives
Commissions oversight
the
emphasizing
whether improvements are needed
and
its
The
objectives
administration
of the
in
the
the
Commissions CSE program
of Bear Stearns and
Commissions
to
determine
monitoring of
CSE
firms
CSE program
of the
Commissions Broker-Dealer
audit on the
Program were to follow up on recommendations made in
Generals OIG prior audit report of the Risk Assessment
Risk
the Office
Assessment
of Inspector
Program Broker
Program Report No 354 issued on August 13 2002
and to examine the Broker-Dealer Risk Assessment process to determine
whether improvements are needed Audit report number 446-B discusses the
Dealer Risk Assessment
Risk Assessment
62
Program
in
detail
Speech by SEC
Source
Washington
and addresses these objectives
chairman Address
Commission
Conference
to
the security
Traders
12th
Annual
May 2008
chttp/lwvnw.sec.govlnewsfspeechl2008lspcho5O708cc.htm
Source
Before
Turmoil
us
statement
64
SEC
Report
of
U.S
Credit
Committee
Christopher
FCommissionl FRB
Sharing
SECs
in
Senate
Commission
Oversight
No 446-A
of
Bear
Market
Examining
the
Housing
on Banking
and urban
Affairs
110th
Cong
April
2008
Cox Chairman commission
Sign Agreement
July
2008
to
Enhance Collaboration Coordination
http//www.sec.govInewsJpressl2008I200B-1
Steams and Related
Entities
The CSE Program
and
Information
34.htm
September
25 2008

Deposit - Southern Investigative Reporting Foundation

Transcription

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For Immediate Release: March 23, 2011