In early 1997, Harrington Bank, a small Indiana savings and loan (thrift) I wonder what their next move should be. Harrington was acquired in 1988 by the principles of Smith Breeden Associates, money management and consulting firm specializing in the application of modern financial technology pricing, hedging and risk management of mortgage-backed securities. Smith Breeden principles created arms-length contract with Harrington, where Smith Breeden advised Harrington on pricing, hedging, active management and risk management assets and liabilities Harrington. Since the acquisition, the bank did very well. Assets grew from $ 75 million in 1988 to more than $ 520 million at the end of 1996. Its net interest margin was more than three times, the core operating profit grew by more than 400%, while return on equity was significantly increased. However, Harrington in 1996 was average thrift. 80% of its assets consisted of mortgage-backed securities (compared to 30% of the average thrift), and most of its obligations was not deposits, but other forms of wholesale funding. "Hide
by Alberto Moel, Robert K. Merton Source: Harvard Business School 15 pages. Publication Date: February 14, 1997. Prod. #: 297088-PDF-ENG
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