The Tip of the Iceberg: JP Morgan Chase and Bear 1. Consider a Commercial Bank about 1973. What would each side of balance sheet have looked like? Commercial banking is mainly about taking deposits/making loans that remained on the lender’s balance sheet. We can say that two main sides of commercial bank's balance sheet are the liabilities and the assets, each of these sides may define the way, which a bank has followed for raising funds and allocating of funds in different asset categories. Commercial Bank can raise money through shareholders share capita, or depositors deposits. This money is the bank's liabilities. On the other hand bank's own sources of income leads to generation of assets for bank. Commercial Banks had deposits or shareholders capital on their Liability side and loans issued, as their main assets, on their Asset side in 1973. 2. Consider an Investment Bank about 1973. What would each side of balance sheet have looked like? Up to 1970’s investment banks were small private partnerships. The partners were putting the money up and obviously they were watching this money very carefully. They wanted to live well and they didn’t wanted to bet. But after deregulation, investment banks went public and got access to huge amount of stockholders money. 3. What activities did Bearn Stearns undertake? Was it a commercial bank or the investment bank? Bear Stearns was the investment bank. We can name 3 main operating businesses of Bearn’s: Capital Markets (brokerage services, market-making and proprietary trading, fixed income securities), Global Clearing Services (prime brokerage business, trade execution and securities clearing, custody, lending and financing to hedge funds and broke-dealers), Wealth Management (managed hedge funds and other investment vehicles). 4. SEC chairman noted that Bear Stearns was an adequately capitalized institution as of March 10, 2008. Do you agree? Bear Stearns never ran short of capital. It just could not meet its obligations. In 2008, Q1, BS total assets equaled 398,995$ and it’s total liabilities were 387,099$. So bank capital was only 11,8$ billion. FDIC-insured institutions fall under two regulatory capital requirements, the leverage-ratio and riskbased-capital requirements. In February 2008, BS had the highest Gross leverage ratio almost 34%. In addition to the leverage ratio, banks are also required to maintain certain levels of tier I and tier II capital relative to riskweighted assets. Risk-weighted assets allow banks to hold different levels of capital for various assets based on those particular assets’ credit risk characteristic. 5. How does the Bear’s mix of financing sources compare to other similar financial institutions?
BS didn’t have access to the Federal Reserve discount window and was solely dependent upon the market liquidity and funding. BS activities were financed with a mix of long-term debt and equity. The bank was also using “overnight REPO’s” to support the trading business and those repos were collateralized from Bear’s inventory. Securities represented 35% of total assets. (138$ billion) And their main source of financing were in form of deposits and combination of repos and borrowings in the “federal funds” market, a market in which commercial banks land to each other. Also the Bears protection was based on the it’s credit-worthiness and on the quality of the underlying assets that secured the REPO’s. (Risk-free, treasury sec and MBS) 6. How would the Bear’s value be affected with the potential bankruptcy? Bankruptcy would have a negative effect: When a firm is on the verge of bankruptcy, its stock value will reflect the risk (value is composed of the potential income that shareholders may receive after liquidation and a premium based on the possibility that the firm may restructure and begin to operate successfully in the future). The main principle of bankruptcy is that it erases debt 7. What price would you pay for Bears ongoing business? Only Bear’s brand new skyscraper, across the street from J.P. Morgan in midtown Manhattan, was worth $1.2 billion alone and Bear Stearns's prime brokerage unit, which provides loans and processes trades for hedge funds, generated $1.2 billion in revenue last year.