Wall Street pulled $10.4 billion (£5.19 billion) of cash and other highly liquid assets out of Bear Stearns in a single day this month, leaving it with only $2 billion and forcing the stricken securities firm to approach JPMorgan Chase in desperation, it emerged yesterday.

Bear Stearns, which agreed a fire sale to JPMorgan on March 16, four days after the mass withdrawal of funds, saw its so-called liquidity pool evaporate after customers and counterparties suffered a crisis of confidence in it, according to Christopher Cox, chairman of the US Securities and Exchange Commission (SEC).

Bear's liquidity pool, which stood at $21 billion early this month, fell dramatically from $18.1 billion to $11.5 billion on March 10 “as rumours spread about liquidity problems at Bear Stearns, which eroded investor confidence”, Mr Cox wrote in a letter to Nout Wellink, chairman of the Basel Committee on Banking Supervision, which has been seen by The Times.

Wall Street offered some respite on March 12, pushing Bear's liquidity pool up slightly to $12.4 billion, before it crashed to $2 billion the following day, according to data supplied by Bear Stearns to the SEC that was contained in Mr Cox's letter.

Oil is the key to world recovery

The shock of $140 oil has created inflationary and deflationary pressures that threaten world economy and policy tools

• Former President Bush energy adviser says oil is running out

Background

• Oil is the key to world recovery

• Banks may need to pump billions into scheme

• UK economic growth weakest for three years

Related Internet Links

• Full credit crunch coverage

Background

• Happy days are over for UK households

• Banks restrict mortgages by brokers

• Credit crunch halves lending at Nationwide

• JPMorgan to cut Bear Stearns jobs

• George Soros: Crunch will bite deeper in UK

Related Links

• Reprieve for UK staff as JPMorgan takes stock

• Bear is attractive in Fed's magic mirror

• JPMorgan bows to pressure on Bear bid

Mr Cox goes on to say that Bear's collapse was “the result of a loss of confidence, not a lack of capital”, pointing out that it had a capital cushion that was “well above” regulatory requirements up to and including the time of its sale to JPMorgan.

“Counter-party withdrawals and credit denials, resulting in loss of liquidity — not inadequate capital — caused Bear's demise,” Mr Cox said.

The comments emerged a day after JPMorgan had bowed to pressure from shareholders in Bear Stearns and agreed to quintuple its all-stock offer for the securities firm to about $10 a share, or $1.4 billion.

However, although the revised offer will appease some shareholders who were calling for a higher price, it is likely to spawn a flurry of new court cases in addition to those in motion.

The most contentious element of the revised transaction concerns the insertion of a side-deal, in which Bear Stearns would issue new shares amounting to 39.5 per cent of the group's equity and sell them to JPMorgan. This share sale appears to secure the deal for JPMorgan, meaning that it needs only a further 10.5 per cent of Bear's shares to gain a majority of the votes. Furthermore, Bear's board has already pledged to vote its 3 per cent holding in favour of the deal.

Normally, New York Stock Exchange rules would require shareholder approval for such a deal, but Bear has sought to circumvent the approval process on the basis that a delay in the new capital raising would jeopardise its financial viability.

Gregory Nespole, a lawyer for the Police and Fire Retirement System of the City of Detroit, said yesterday that he was “weighing whether it is appropriate to seek a temporary restraining order” on the new issue of Bear Stearns shares. Mr Nespole has teamed up with the Wayne County Employees' Retirement System pension fund as he mulls a bid to bar the side-deal from influencing the result of the shareholder vote on the revised deal.

If they pursue the case, they are expected to argue that a delay in the new capital-raising would not jeopardise Bear since the Federal Reserve last week extended its “discount window” of cheap loans to include securities firms such as Bear as well as commercial banks.

Mr Nespole, who works for the law firm Wolf Haldenstein Adler Freeman & Hertz, said that his group represented pension funds that were unhappy with the transaction value, which is still a fraction of Bear's share price earlier in the month. “At this juncture, based on the public record and based on the company's stock price, which continues to trade at a premium ...the $10-a-share figure remains inadequate,” Mr Nespole said.

Bear Stearns was among the firms hit hardest by the collapse in sub-prime mortgage bond valuations, but hundreds of firms have suffered significant credit losses. Yesterday, Goldman Sachs estimated that eventually the sub-prime mortgage fallout would lead to $1,200 billion of “credit losses” worldwide.

Times Recommends

• UK savings frozen after Landsbanki goes bust
• RBS shares fall under £1 on bailout fears
• Asian stocks rebound on Australian rate cut