JP MORGAN PRIVATE BANK Harvard Case Solution & Analysis

JP MORGAN PRIVATE BANK Case Solution

PROBLEM STATEMENT

Due to the financial crisis in the year 2008-2009, many investors were reluctant to invest in any shares because of their lack of confidence. By following the old technique, evaluating the risk management in a portfolio was not very efficient because of its underlying assumption. Therefore, the efficiency of new technique in managing the risk is evaluated on AIG’s Financial Products. Moreover, by looking at skills of Georgiy Zhikharev, a recommendation is required regarding his role as risk advisor to the risk manager.

JP MORGAN ASSET MANAGEMENT

The company earns profit by charging direct and indirect fees and commission on AUM (Assets Under Management). The group consists of financial products including the mutual funds, cash management, fixed income segments, private equity management, and real estate investment management. The company has worldwide presence and its clients include large corporations, governments, foundations, endowments, and prominent individuals. The company competes by providing various innovative investing strategies to their clients with the help of strong marketing.

FINANCIAL CRISIS

CAUSES

The financial risk is caused by the banks providing loans without analyzing their credit rating and their history. These loans together with the other assets are sold across the globe. From the historical data, it has been already concluded that the housing market would likely fall in the future, coupled with the increasing interest rate in the market resulted in significant increase in default risk of non repayment of their mortgages.

The overall situation created a lack of confidence in investors on taking the collateralized debt obligations. Even the banks stopped providing credit facilities to each other due to the financial crisis. In addition, due to the huge investment in mortgaged backed securities, the financial institutions suffered heavy losses because of the fall in housing prices.

Moreover, the situation got even worse when Two Bear Stearns who invested heavily in mortgage market failed and sold to JP Morgan at a throw away price in the year 2008. The overall situation increased the credit risk and had a profound adverse effect on the investors and the entire mortgage industry due to use of high leverage in the capital structure.

IMPACT

The overall financial crisis affected the performance of stock market as well as financial institutions. The investment banks stopped providing credit facilities andcollapsed due to the significant decrease in housing prices in the market, which caused the increased default risk of repayment of debt.

Moreover, financial institutions responded by selling all their assets to pay off their debt, this process is also called deleveraging, which decreases the prices of assets and results in further decline of financial condition. This financial crisis resulted in too little capital for the financial institutions to provide loans to individual investors in the market. (Besner, 2008)

RECOMMENDATION FOR GEORGIY ZHIKHAREV

Mr. Georgiy Zhikharev provided vital information with regards to risk management every individual faced in their portfolio with his outstanding knowledge and skills. In addition to this, through his tremendous efforts, a new risk management model he provided, which included eleven different factors in analyzing the overall risk and return in a portfolio that includes the direction of rates, credit spreads, equities, volatilities, and commodities. From his overall efforts, he seemed a much more reliable person to whom the responsibility of overall risk management can be assigned.......................

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