...Header: Bear Stearns Corporate Governance Issues at Bear Stearns Article Summary: In the summer of 2008 the global financial crisis swept away trillions of dollars in net worth, wiping out people’s retirement savings, and causing the loss of millions of jobs. As the world slipped into recession, people looked for answers, and a place to rest blame. At Bear Stearns, a venerable financial firm which was brought down by mistakes made by decisions made by management, there is much blame to be shared. This paper seeks to explore the corporate governance decisions which created this crisis, and which ultimately led to the almost complete destruction of shareholder value for Bear Stearns’ investors. In good times, the shareholders at Bear Stearns were handsomely rewarded by the very decisions which would ultimately end the company’s storied 85 year history and send the global economy into the deepest and most painful recession since the great depression. The firm’s stock traded at $160 a share and several key executives held stock valued at almost $1 billion dollars, but it is clear that hubris, greed, and incredible egos and personality conflicts were the cause of the firm’s demise. In May of 2008, The Wall Street journal published a three part series written by Kate Kelly on the last days of Bear Stearns. Kelly’s articles consider all the factors which brought about the company’s demise, and provide insight into the corporate governance issues which helped seal Bear Sterns...
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...Bear Stearns Case * * * Key Ratios Capital Ratio: This is a measure of a bank's financial strength based on the sum of its equity capital and disclosed reserves. A Tier 1 capital ratio of 6% or greater would classify the banks as well capitalized. At the beginning of March, Bear Stearns had virtually no assets valued at level 1 which leaves their capital ratio at virtually 0. Leverage Ratio: the Tier 1 leverage ratio is calculated by dividing Tier 1 capital ratio by the firm's average total consolidated assets. The Tier 1 leverage ratio is an evaluative tool used to help determine the capital adequacy and to place constraints on how banking firm can leverage its capital base. Bear Sterns claims total assets of $140 billion dollars but because the capital ratio is so small the leverage ratio is also going to be very small. Debt to equity: Bear Stearns had a debt to equity ratio of nearly 32. Anything over 2 is generally considered a high debt to equity ratio. As all companies leverage debt, 32 is a huge ratio. Altman Z- Score: With a market cap of around $1300 and Bear Sterns had an Altman Z- Score of nearly -3.6. The Altman Z Score takes four different ratios and create a multiple that determines how likely bankruptcy is. -3.6 indicates bankruptcy is likely. Traditional Ratio Analysis: When the traditional ratios are ran, nearly all are outside the benchmark range or less than the benchmark. The traditional ratios clearly show a problemed...
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...Investment Banking in 2008 (A): Rise and Fall of the Bear 1. What role did Bear’s culture play in its positioning vis-à-vis its competitors, and what role might that culture have played in its demise? Bear Stearns played a risky role with the promise of high returns. Bear was participating in the LTCM and created a bubble. Bear’s competitors recognized and hedged against risk by participating in the buyout while Bear Stearns ignored the bullish market. Other banks hired both externally as well as internally so they received other opinions and perspectives, but Bear Stearns only hired internally. Bear ignored concerns while others hedged for possible risk. While all the banks were losing money from CDO’s, Bear’s losses were the most looked at and brought the most fear. 2. How did Bear’s potential collapse differ from that of LTCM in the eyes of the Federal Reserve? Bear Stearns had a chance to contribute to the bail out which may have saved them. The LTCM demanded high returns and the market could not satisfy these expectations. Bear should have learned from the LTCM collapse so one thing that differed is the banks had more knowledge after the collapse and should have done things differently. Also, it was a less turbulent market when Bear collapsed. 3. What could Bear have done differently to avoid its fate: 1. In the early 2000s? In the early 2000s, Bear Stearns tried to issue shares that were later called “toxic waste” so the bank...
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...WORST AND BEST CEOS OF 2008 Jamie Dimon, 52 CEO, JPMorgan, New York Dimon largely shunned the subprime bets and exotic financial instruments that brought down rivals. As a result, JPMorgan was able to pick up the pieces of Bear Stearns when it imploded in March and later absorb collapsed mortgage lender Washington Mutual. That doesn’t mean JPMorgan is immune to the turmoil. “We are not holding ourselves up as paragons of virtue,” says Dimon. “We were not exceptional in every category. But if you don’t do a good job for the customers, you’re never going to do a good job for the shareholders. That’s the point of a commercial enterprise.” Takeo Fukui, 64 CEO, Honda, Tokyo While it has outperformed rivals with fuel-efficient small cars, even Honda sees fewer sales. Fukui has cut costs, but he refuses to skimp on innovation and research. Best advice he’s received: “The basic social responsibility of a business is to both maintain employment and meet the obligation to pay taxes.” Great book: How to Stop Worrying and Start Living by Dale Carnegie. “Regardless of my job description, as an engineer or member of company management, this book provided spiritual support when I faced difficult challenges in the business world.” Jim Sinegal, 73 CEO, Costco, Issaquah, Wash. Many retailers scrambled to raise prices this year amid rising costs. Not Sinegal. He held back price increases longer than his peers to gain market share for his membership-only chain. The move paid off: 87%...
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...Bankruptcy of Lehman Brothers Causes CAUSES Malfeasance A March 2010 report by the court-appointed examiner indicated that Lehman executives regularly used cosmetic accounting gimmicks at the end of each quarter to make its finances appear less shaky than they really were. This practice was a type of repurchase agreement that temporarily removed securities from the company's balance sheet. However, unlike typical repurchase agreements, these deals were described by Lehman as the outright sale of securities and created "a materially misleading picture of the firm’s financial condition in late 2007 and 2008 Subprime mortgage crisis In August 2007, the firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took an after-tax charge of $25 million and a $27 million reduction in goodwill. Lehman said that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources and capacity in the subprime space". In 2008, Lehman faced an unprecedented loss to the continuing subprime mortgage crisis. Lehman's loss was a result of having held on to large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages; whether Lehman did this because it was simply unable to sell the lower-rated bonds, or made a conscious decision to hold them, is unclear. In any event, huge losses accrued in lower-rated mortgage-backed securities throughout 2008. Short-selling allegations...
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...| |Financial Management | |[2007 Financial Collapse] | |This report will inform you of how the lack of oversight and management caused the financial collapse and the housing market to plummet. | [pic] TABLE OF CONTENTS Introduction………………………………………………..………… The History…………………………………………………………… Causes………………………………………………………………. The Run Up………………………………………………………… Lehman Brothers………………………………………………… Bank of America…………………………………………………… Fallout……………………………………………………………… Conclusion………………………………………………………… INTRODUCTION In 2007, the United States was in the midst of the largest mortgage and financial crisis since the Great Depression. The impact of the financial collapse caused many Americans to lose their homes and their jobs. Across the country, mortgage delinquencies and foreclosures have hit an all-time recorded high, with 11% of loans currently two or more payments behind. Complicating matters, 24% of borrowers are “underwater,” having mortgage balances greater than the values of their homes. The lack of financial management caused two large investment banks and the largest insurance firm in the world to cripple the Dow Jones Industrial Average by nearly 30% within 2-3 weeks. The financial collapse did not just affect home owners, but many financial firms were now facing...
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...Ethics in Lehman brothers Always thought Amartya Sen Nobel Prize in economics that economic ethics is a prerequisite for the development of the economies of the world factor. Historically, the company has focused on the management of its tangible assets to protect its reputation through a financial impeccable acting. In the Lehman Brother lacked ethics. Few years ago was enough Appear in the market for a company to be accepted by its stakeholders, but it is no longer acceptable consumer confidence has worsen by extremely serious corruption scandals and empty moral that last years have plagued economic sectors as if Bear Stearns Lehman Brother, Madoff, the energetic (Enron), telecommunications (WorldCom), and in racing a (Toyota). The culture in the majority of the big companies is the same in some cases as Lehman Brothers, some CEO, don’t have the time to review the statements for that reason the company hiring a some person who take charge of this politics, but in the case of Lehman’s Brothers is different because the CEO of the company knows what happen, When Lehman Brother beginning to use the money to buy toxic stocks and bonds is this the beginning of the fall of Lehman Brother. In the other hand the ethic is lack in Lehman Brother in other companies like Lehman is talking about Enron has the same problems of Lehman their finance is not clear they starting use the money they have to purchase toxic stocks the shareholders try to cover their actionist and use the...
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...more than 158 years is no longer in business. On September 15th 2008, the Lehman Brothers, which was once know as one of the biggest investment banks, provided that it was going to file for bankruptcy protection (Mamudi). This news was received by the world at the time the market was expecting that someone will come out and help this organization. The bankruptcy of the Lehman Brothers was not expected by anyone, and many people hoped that either a private company or the government was going to bail out the firm and prevent the bankruptcy move. Before that, there were talks indicating that, Barclays bank and Bank of Africa wanted to take over the investment bank (Sorkin). However, other organizations like the Federal Reserve that aided Bear Stearns to deal with the US Treasury were not willing to help the Lehman Brothers with their problem (Sorkin). The firm filed for bankruptcy with about $639 billion in assets and about $619 billion in debt, which makes its bankruptcy filing the largest in history, while its assets surpassed the assets of the previous bankrupt giants like Enron and WorldCom. According to Qatinah (2012), the organization was the fourth largest US investment bank at the time it collapsed, with more than 25,000 employees. The history of the Lehman Brothers can be traced back to 1844 when Henry Lehman travelled to the US for Bavaria and decided to settle in Montgomery, Alabama. He opened store “H. Lehman” that dealt in dry goods. The name of the firm was changed...
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...CASE: Quality of Earnings #2 – Bear Stearns & Co 1. What is Blockbuster's amortization timetable? Do you think it is appropriate? The amortization timetable of Blockbuster is 40 years. In my opinion as an investor's perspective, it is not appropriate because of this is not as per the SEC standard of 5-7 years. 2. What would be the impact on Blockbuster's 1988 earnings per share if 5 amortization were applied to this goodwill? If the 5-year amortization were applied in its place of the 40-year timetable, then it is necessary for Blockbuster to identify the goodwill in larger amounts. This would increase tax liability of Blockbuster, which would have represented a loss of $0.09 (0.58 - 0.49) per share | 1988 | 40 Yrs. Total | 5 Yrs. Amortization | Current Amortization | 769,000.00 | 30,760,000.00 | 6,152,000.00 | Operating Income | | | 26,345,000.00 | New Operating Income | | | 20,193,000.00 | Income Tax | | | 7,673,340.00 | Net Income | | | 12,519,660.00 | Outstanding Shares | | | 25,741,549 | Earnings Per Share | | | 0.49 | 3. What would have been the effect on earnings per share if Video Superstore purchases were not included in 1988 revenues? If Video Superstore purchases were not included in 1988 revenues then there would be negative effect on earnings per share. The earnings-per-share would be lower in that condition...
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... 2011). When loans stated to go bad, the bank was required to take them out of the securitization products and seek restitution from the mortgage originators. The impact that it had on the company was very negative as far as it’s financial and operations were families where improperly foreclosed on, and will be able to save or get there homes back. JPMorgan Chase agreed to pay $13 billion dollars to settle the allegations on the mortgage back securities it sold. It played a major part in the financial crisis in 2008. Wall Street was affected, stocks went down and it affected the entire market. Families are still felling the affect today. There are some drawbacks for those who are seeking tougher action on Wall Street. “All the while Bear Stearns which was acquired by JPMorgan Chase in 2008 was telling the investors that it carefully investigated all...
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...LEHMAN BROTHERS: TOO BIG TO FAIL? WILLIAM RYBACK LEHMAN BROTHERS: TOO BIG TO FAIL? Copyright by the Toronto Leadership Centre. This case was prepared exclusively for a class discussion at a Banking, Insurance or Securities session offered by the Toronto Centre. Information has been summarized and should not be regarded as complete or accurate in every detail. The text should be considered as class exercise material and in no way be used to reach conclusions about the nature or behaviour of any of the persons or institutions mentioned.. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form without the permission of the Toronto Leadership Centre for Financial Sector Supervision. Sources: This document is based on information that was in the public domain at the times mentioned or which became public after the resolution of the issues. It does not include information confidential to the financial institution involved. 1 LEHMAN BROTHERS: TOO BIG TO FAIL? WILLIAM RYBACK This case study is written and presented by William Ryback, former special advisor to the Financial Supervisory Service in Seoul, Korea; Deputy Chief Executive of the Hong Kong Monetary Authority; and career bank supervisor in the United States. The material presented is derived from public media sources. INTRODUCTION In this case study an example of a large bank failure and its after effects on the financial markets is presented...
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...from 1940 to 1980, followed by a long period of deregulation. At the end of the 1980s, a savings and loan crisis cost taxpayers about $124 billion. In the late 1990s, the financial sector had consolidated into a few giant firms. In March 2000, the Internet Stock Bubble burst because investment banks promoted Internet companies that they knew would fail, resulting in $5 trillion in investor losses. In the 1990s, derivatives became popular in the industry and added instability. Efforts to regulate derivatives were thwarted by the Commodity Futures Modernization Act of 2000, backed by several key officials. In the 2000s, the industry was dominated by five investment banks (Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns), two financial conglomerates (Citigroup, JPMorgan Chase), three securitized insurance companies (AIG,MBIA, AMBAC) and the three rating agencies (Moody’s, Standard & Poors, Fitch). Investment banks bundled mortgages with other loans and debts into collateralized debt obligations (CDOs), which they sold to investors. Rating agencies gave many CDOs AAA ratings. Subprime loans led to predatory lending. Many home owners were given loans they could never repay. Part II: The Bubble (2001–2007) During the housing boom, the ratio of money borrowed by an investment bank versus the bank's own assets reached unprecedented levels. The credit default swap (CDS), was akin to an insurance policy. Speculators could buy CDSs to bet against CDOs...
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...part of the paper describes this trend towards the “originate and distribute” model and how it ultimately led to a decline in lending standards. Financial innovation that had supposedly made the banking system more stable by transferring risk to those most able to bear it led to an unprecedented credit expansion that helped feed the boom in housing prices. The second part of the paper provides an event logbook on the financial market turmoil in 2007– 08, ending with the start of the coordinated international bailout in October 2008. The third part explores four economic mechanisms through which the mortgage crisis amplified into a severe financial crisis. First, borrowers’ balance sheet effects cause two “liquidity spirals.” When asset prices drop, financial institutions’ capital erodes and, at the same time, lending standards and margins tighten. Both effects cause fire-sales, pushing down prices and tightening funding even further. Second, the lending channel can dry up when banks become concerned about their future access to capital markets and start hoarding funds (even if the creditworthiness of borrowers does not change). Third, runs on financial institutions, like those that occurred at Bear Stearns, Lehman Brothers, and Washington Mutual, can cause a sudden erosion of bank capital. Fourth, network effects can arise when financial institutions are lenders and borrowers at the same time. In particular, a gridlock can occur in which multiple trading parties fail...
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...Project Report Subject: Islamic Banking & Finance Submitted to: Sir Hamad Rasool Bhullar Submitted by: Maria Saleem (l1s10bsaa2009) Imran Arif (l1s10bsaa2031) Zeeshan Ahmed (l1s10bsaa0033) Gohar Nouroze (l1s10bsaa2018) Hassan Sarib (l1s10bsaa0011) Umair Khan (l1s10bsaa2006) Inside Job Inside Job is a 2010 documentary film about the late 2000s economic catastrophe Charles H. Ferguson. In five parts, the film delves into how changes in the policy environment and banking practices helped generate the financial crisis. Background of Iceland: Iceland had a stable environment and it was a complete structure of a modern economic society. Its population was 320,000 with a GDP of $13 billion. Gylfi Zoega Professor of Economics at the University of Iceland said that, “A fine location for families to live happily.” In 2000, Iceland’s government began a policy of deregulation. This set up the basis for the banks to upload debts when the foreign companies were accumulated. As the crisis unfolded itself the banks became unable to refinance their debts. The financial crisis of Iceland was the largest suffered by any country in the economic history. It was a political crisis collapse of all the three major privately owned commercial banks, with their difficulties in the refinancing their short term debt and run on deposits. In September 2008, Glitnir bank would be nationalized followed by the Landsbanki. Two days later another bank, Kaupthing was also nationalized...
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...Parker J Investment Banking Even though Bear was involved with investment trades around the world, the Fed did not grant Bear a government bailout. The Fed did step in to help maintain stability for the market, but LTCM for Bear was out of luck. Bear differed from its downward pressure on global securities prices, market stability, the possibility and probability to crash fast and hard, and the market environment was simply too hectic. Well first and foremost, the biggest change that could have been made, would be to hold the bridge tournament a couple months earlier. I believe that would have changed the outcome of Bear Stearns and allowed Cayne to save the day. All joking aside, from reading the article or case study, CDO’s and ARM’s were not the only destruction of Bear, just the final blow. Similar to what is happening in China right now with failing/decreasing hedge funds, Bear called in $500 million of short term debt to cover its losses from an unprofitable hedge fund. There was also a $38 million dollar fine paid to the SEC for fraudulent behavior. They were caught up in the CDO craze like everyone else and accepted way too many mortgages without knowing the details. Cayne must not have grasped the situation in its entirety. I can’t believe he announced they had $11.4 billion in cash and was now taking the situation seriously. The hole was much deeper than that. March 10, 2008, I believe, is where they were caught in the biggest fraud. Even though they didn’t...
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