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 lenders 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 1970s 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 didnt 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 Bearns: 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 its 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 Bears mix of financing sources compare to other similar
financial institutions?

BS didnt 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 REPOs to support the trading business and those
repos were collateralized from Bears 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 its credit-worthiness and on the quality of the underlying assets that
secured the REPOs. (Risk-free, treasury sec and MBS)
6. How would the Bears 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 Bears 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.