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The Tip of the Iceberg JP Morgan Chase and Bear Stearns (A) Case Solution

Solution Id Length Case Author Case Publisher
1422 1008 Words (3 Pages) Daniel B. Bergstresser, Clayton Rose, David Lane Harvard Business School : 309001
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Fortress balance sheet is the one which has the objective to maintain the capital and liquidity requirements which not only far exceeded the regulatory requirements but also are compatible with the other market players. There are four components of this strategy which includes huge amounts of cash capitals. Secondly, it includes term funding with a goal to create a match between assets and liabilities. Moreover, stress testing which are indicators of unlikely but large losses is also a part of this strategy. And finally liquidity reserves against the quantity of assets which become illiquid. The nature of the capital base is also very important here, and the managers at JP Morgan make sure there is more quantity of common stocks rather preferred stock. Conservative accounting is another vital part of the “fortress balance sheet” which is oriented towards the more prudent concept. For example deferring the revenues until they are realised.

Case Analysis for The Tip of the Iceberg JP Morgan Chase and Bear Stearns (A) Case Solution

1. JP Morgan’s balance sheet was highly loaded with the contingent calls which were options provided to customers to provide liquidity to option holder at their discretion. Other than that $12 Billion worth of mortgage backed securities which were called Collateralized Debt Obligation was sold off and appeared on the balance sheet. These are the riskiest instrument offered by the bank as they based on subprime lending.

2. The government of United States turn to JP Morgan to buy Bear as the Bank has a quite successful history of mergers, and itself was a result of multiple mergers. The bank was operating at a global level with $146.9 Billion of market capitalization and 180,000 employees. The bank has diversified operations which exceeded Bear many times. JP Morgan was doing well in corporate lending, leading the credit card business and operating the retail business as well. These are the main reasons that the government think that it would be reasonable to turn to JP Morgan to buy Bear.

  • When Dimon became the CEO of JP Morgan, he and his team started the cost cutting processes, enhancing the business operation and investing in infrastructure and technology. The managing style implemented by the new CEO enable the financial managers to showcase their best performance in every line of business.

  • Because of the Dimon’s dominating management style, the market started to perceive JP Morgan as one man’s bank. This was an unhealthy view of the bank for which the primary reasons were the rounded policies implemented by Dimon.

3. If Bear were allowed to fail, it would have far reaching consequences not only on the banking market but on the entire economy. The extensive insolvencies and stiff damage to the financial system would have taken place. For example, it was predicted that if an appropriate response were not executed the cost would include lower income for the working people, higher costs of funds for residential purposes, education and for expenses of routine life, a surge in unemployment and lower value of saving and retirement schemes.   

  • It could be slightly probable that allowing Bear to fail might be an appropriate response. But considering the adverse effects mentioned above, it is very unlikely that allowing Bear to fail could bring something positive. Although, bailing out the bank set precedent that government can save an entity from insolvency hence the risk taking the behavior of entities was encouraged by this move. Therefore, allowing Bear to fail would be an example set by the government to deter reckless risk taking.

4. Bear Stearns was involved in the business of reselling subprime mortgage backed securities which was the major cause of financial crisis. By acquiring Bear, JP Morgan associated itself with those misdeeds.

  • I think the price that JP Morgan paid for acquiring Bear Stearns is appropriate. It purchased Bear from $2 per share which allowed JP Morgan to enjoy 93% discount Bear’s closing stock price.

  • The major rational behind buying Bear is that it aimed to add $1 Billion in incremental earning once the deal is completed.

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