Bear's Financial Crisis
Q1.
LTCM was very large in size and took the role of counterparty in thousands of derivatives trades with many investment firms around the world. There was a threat that the fund’s going bankrupt would trigger a wider collapse in the international securities market. To maintain the stability of the market, the U.S. Federal Reserve stepped in, and a number of major investment banks were convinced to give LTCM a bailout. However, the Fed played an advisory role in this crisis and did not give a government bailout.
Bear’s crisis differ from that of LTCM in several ways: chaotic market environment, downward pressure on global securities prices, market stability, collapse at a very fast speed, bailout from another investment bank is considered too risky to be taken alone, the Fed from an advisory role to a principal role, JP borrow from the discount window to finance Bear
Q2. …show more content…
a. in early 2000s, Bear should not trade CDOs.
b. during the summer of 2007, after Cioffi’s hedge fund turned unprofitable, it should not increase the leverage, when there was illiquidity problem with the fund, Bear should inject its own capital to save it
c. during the week of March 10, 2008, Bear should dispel the rumors, improve the public relation, it was rumor and pressure from the public that led to the collapse of Bear
Q3.
JP Morgan stood to benefit from Bear’s implosion, for it is acquired at a price of $2 per share, a 97% discount off its close price of $32 per share on the previous Friday.
Lessons learned • imperial CEO mode (JC and AS) C accused of neglecting duties in favor of hobbies such as bridge(was playing bridge when two of his hedge funds collapse) • JC moved to chairman after resigning as CEO, hard for AS to criticize previous moves • Agency—approximately one third of the shares were owned by employees, JC himself 5%, in theory may mitigate the agency problem but it seems that BS still run for short term
LTCM was very large in size and took the role of counterparty in thousands of derivatives trades with many investment firms around the world. There was a threat that the fund’s going bankrupt would trigger a wider collapse in the international securities market. To maintain the stability of the market, the U.S. Federal Reserve stepped in, and a number of major investment banks were convinced to give LTCM a bailout. However, the Fed played an advisory role in this crisis and did not give a government bailout.
Bear’s crisis differ from that of LTCM in several ways: chaotic market environment, downward pressure on global securities prices, market stability, collapse at a very fast speed, bailout from another investment bank is considered too risky to be taken alone, the Fed from an advisory role to a principal role, JP borrow from the discount window to finance Bear
Q2. …show more content…
a. in early 2000s, Bear should not trade CDOs.
b. during the summer of 2007, after Cioffi’s hedge fund turned unprofitable, it should not increase the leverage, when there was illiquidity problem with the fund, Bear should inject its own capital to save it
c. during the week of March 10, 2008, Bear should dispel the rumors, improve the public relation, it was rumor and pressure from the public that led to the collapse of Bear
Q3.
JP Morgan stood to benefit from Bear’s implosion, for it is acquired at a price of $2 per share, a 97% discount off its close price of $32 per share on the previous Friday.
Lessons learned • imperial CEO mode (JC and AS) C accused of neglecting duties in favor of hobbies such as bridge(was playing bridge when two of his hedge funds collapse) • JC moved to chairman after resigning as CEO, hard for AS to criticize previous moves • Agency—approximately one third of the shares were owned by employees, JC himself 5%, in theory may mitigate the agency problem but it seems that BS still run for short term