Bear Stearns appetite for risk was questioned at a hearing into the roots of the financial crisis, where former executives testified that the firm's collapse was due to events beyond their control.

The executives painted the firm as victim of an extraordinary loss of confidence in March 2008 that caused investors to flee despite its strong capital position and substantial liquidity.

But the chairman of the Financial Crisis Inquiry Commission said Bear Stearns was highly leveraged in 2007 with a significant portfolio of mortgage-backed securities, and loans with no documentation or deficient documentation.

Why would you think that would be sustainable in any kind of market disruption? Angelides asked at Wednesday's hearing.

Bear Stearns was the first investment bank to experience a run on the bank in the crisis. Similar fears led to the demise of Lehman Brothers in September 2008 and the reorganization of the other three large investment banks.

Although this loss of confidence in Bear Stearns was unwarranted given the firm's strong capital position and substantial liquidity, it resulted in a rapid flight of capital from the firm that could not be survived, Paul Friedman, Bear's former senior managing director, told the commission.

Friedman echoed comments made by former Chief Executive James Cayne, who left that post in January 2008, just months before Bear was sold to JPMorgan Chase & Co for a fire-sale price.

Subsequent events show that Bear Stearns' collapse was not the result of any actions or decisions unique to Bear Stearns. Instead, it was due to overwhelming market forces that Bear Stearns, as the smallest of the independent investment banks, could not resist, Cayne said in testimony prepared for the commission.

Five former Bear Stearns executives, including Cayne's successor Alan Schwartz, were called to testify before the commission on Wednesday.

Angelides sounded incredulous that Bear did not better position itself to survive a credit crunch. It seems like there were a lot of warnings signs, a lot of red and yellow lights going off.

Bear's fall was swift in March of 2008. Despite an emergency line of credit from the Federal Reserve, it became clear the firm could not survive on its own.

The Fed and U.S. Treasury scrambled to arrange a sale to JPMorgan for the eventual price of $10 a share.

Five months later, Lehman filed for bankruptcy and the remaining large investment banks -- Merrill Lynch, Goldman Sachs and Morgan Stanley -- sought safety in the form of federal oversight. Merrill was bought by Bank of America. Goldman and Morgan became bank holding companies and are now subject to much stricter capital requirements and regulation.

All five investment banks were loosely supervised by the Securities and Exchange Commission for capital and liquidity requirements under the agency's so-called Consolidated Supervised Entity program.

That SEC program, which was voluntary, has since been dismantled.

SEC Chairman Mary Schapiro has said the program was a failure and not adequately staffed. Former SEC Chairman Christopher Cox, who was at the helm of the SEC during the 2007-2008 financial crisis, has also blasted the program's shortcomings.

Other witness due to testify on Wednesday include Cox and his predecessor, William Donaldson, and the SEC's inspector general, who has criticized the agency's oversight of investment banks.

On Thursday, the commission is due to hear from former Treasury Secretary Henry Paulson and current Treasury Secretary Timothy Geithner.

(Reporting by David Lawder, Rachelle Younglai, Karey Wutkowski; Editing by Tim Dobbyn)

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