JP Morgan Chase and Bear Stearns Harvard Case Solution & Analysis

JP Morgan Chase and Bear Stearns Case Study solution 

Banks then and now

Since the inception of the banking concept, it is analyzed that several industries took considerable advantage over the financing or lending activities. The banks were the major players to contribute to the economic growth in the past century. However, under the particular case, it seems that there is a huge difference between the banking performances of the current year (2008) as compared to 1973 because the banks were not subjected to utilize the activities under various financial instruments related to the current scenario.

That’s why the leverage ratio in 1973 was indicating a lower amount of balances with less risk involved in the liquidity perspective.On the other side, the asset side of the commercial banks was showing a moderate level of balances because there were only a few financial instruments available to generate the profits and increase the assets over time. There is a little concept for the investment banking unit because many industry players were mostly involved in the lending criteria for expansion instead of Purchasing the securities because the concept was not incepted during the relevant period.

Thus, the new era indicates a rapid growth in both the financial instruments and the huge amount of balance sheet items. In contrast to it, the investment banking in the prior years was only considering the fees and other assets on asset side under the IPO issue terms. The liabilities section involved took the amount of the companies to issue the initial public offerings. There were other sources of liabilities for both the banks as well, but the bottom line is, there is a vast difference between the balance sheets of current and prior years.

The primary reason is the lack of leverage ratio in the prior years compared to the current year. Bear Stearns is an investment banking unit which involved in various financial products to offer and consider earnings and revenues from them. The bank participated in the activities of the repurchase agreements (repo)to reduce the risk of default. The focus was to exchange the asset-backed securities with the new modified high-rated securities.

It was somehow inversely proportional to current economic conditions that not allowed to manage the securities properly. Therefore, these actions were seemed irrelevant to execute and considered a situation of bankruptcy for BearStearns due to the high complexity of the debt evolvement over time. With all these actions, it is concluded that banking sector is the most critical to evaluate the predicted outcome because the financial markets have no concern over the continuous performance.

Assessment of the adequately capitalized institutions

Awell-capitalized criterion involves high equity value over debtwhich means that an organization has an ability to pay-off the debt and capitalizea number of dividend payments and retain earnings. Under the particular case, it shows that the statement of Christopher Cox was irrelevant about adequate capitalized system of Bear Stearns. The reason was the indication of the balance sheet items where an enormous amount of debt was taken as compared to the equity portion.
Therefore, Bear Stearns was surviving to retain the operations in the years of financial crisis. However, it managed to resume the business operations efficiently. The standards to reduce the risk of default was by entering into the repo agreements and thus increased the debt level in the balance sheet of the organization. According to Cox, the reason to show the adequate capitalization was that Bear Stearns managed to survive the economic recession where most of the market giants were bankrupted.

It is assessed that the situation was not good for the Bear Stearns to increase the capital adequacy ratio. The situation of high debt ratio over equity was same for the Lehman Brothers and Morgan Stanley as compared to Bear Stearns. The comparative analysis indicates that those investment banks were not able to survive during the economic recession. Thus, it was considered that Bear Stearns were the only one successful in the given situation.

Before the crisis, the financial institutions are involved heavily in the practice of asset-backed securities subjected to high debt amount. Where most of the players were taken the amount of debt to invest in the mortgage-backed securities for the high rate of return. However, the situation was not preferable for generating the earnings and thus made a negative impact on the economy subjected to the financial crisis. It seems that the well-capitalized institutions were not invulnerable for such crisis because of the reason of inability to manage the debt amount taken as mortgage-backed securities, asset-backed and other long-term debt subjected to default or not met the debt covenants. So, none of the industries were specifically targeted for such crisis.

JP Morgan Chase and Bear Stearns Harvard Case Solution & Analysis



Financing Mix

The short term debts of Bear Stearns was little from the market average ratio. Short-term debt usually are more risky for the company where Merrill lynch had the highest short-termdebts. The average of the repo financing of the industry was 168 where the corporation had the lower repo financial which was apositive point for it.  From the market perspective, Bear Stern carried less current assets as compared to the other investment companies...............................

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