The correct answer is B.

Bear Stearns was one of the earliest major casualties of the financial crisis. It was a leader in the structured finance market, and its downfall was accelerated by its exposure to two internal hedge funds that had made highly leveraged bets on subprime mortgage-backed securities. As the crisis unfolded, these funds collapsed, amplifying the firm’s liquidity pressures. By March 2008, Bear Stearns had lost the confidence of counterparties and was forced into a government-assisted sale to JPMorgan Chase, marking one of the first major institutional failures of the crisis.

Explanation of Incorrect Choices:

A) Lehman Brothers – While Lehman Brothers also had significant exposure to mortgage-backed securities, it did not have two internal hedge funds that collapsed due to mortgage losses. Additionally, Lehman’s failure occurred later in September 2008, rather than in March.

C) AIG – AIG was not a traditional investment bank but an insurance giant. While it played a pivotal role in the crisis due to its massive exposure to credit default swaps (CDS), AIG’s liquidity crisis peaked later in September 2008, requiring an emergency bailout. The firm was not involved in a fire sale to another bank.

D) Fannie Mae – Fannie Mae was a government-sponsored entity (GSE) and not an investment bank. While it suffered heavy losses due to its exposure to mortgage-backed securities, it was placed into conservatorship in September 2008 and did not face the immediate liquidity-driven collapse described in the question.