Case 2_ Bear Stearn final.docx - Financial Innovation and...

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Financial Innovation and Hedge Funds course Case study Assignment 2 Investment Banking in 2008 (A): Rise and Fall of the Bear Professor Joni Kokkonen Enrico Tuci, 15241860 Simone Morsiani, 15241892 Matthias Müller, 152418102
Miguel Corte, 152418069 1. What role did Bear Stearns’ culture play in its positioning with respect to its competitors, and what role might that culture have played in its demise? The culture and set of values of an organization plays a central role for a business’s success or failure. In Bear Stearns’ early life this appear to be one key aspect that significantly helped to their success, but at the same time during the crisis it turned against them contributing to the failure. Since the first years Bear Stearns’ showed a tenacious, cutthroat and renegade culture setting the standard for diversity among its employees, valuing initiative and tenacity over pedigree in its hiring process. As Alan Greenberg stated, “we are really looking for people with PSD degrees: meaning poor, smart and with a deep desire to become very rich”. They had a mixture of all kind of people and the common point was that they were there to make money. This culture for a substantial period of time gave them a competitive advantage over competitors as unlike other financial institutions who were said to be made up of the stereotypical WASP people. They were for the most part born into wealth and power, while the staff at Bear Stearns were not and so were arguably highly motivated and possibly more willing to take risks. Indeed, in order to reach higher returns, Bear Stearns often resorted to high leverage and thus often bearing higher risks than its competitors. However, in the face of enormous returns, Bear continued to undermine its accumulating risks and rising volatility. In the early life these risks and the tenacious culture paid dividend. In 1985 they went public diversifying its operations, becoming a full-service investment bank. The firm remained resilient avoiding layoffs continuing to pay bonuses during the Great Depression with their use of government securities and even on Black Monday they showed their resilience when the Dow Jones plummeted. The attitude of wanting it more led them to a dominant position in bond trading and initial growth far greater than their competitors. However, it could be argued that their culture did play a part in the demise of the company, their cutthroat attitude was seen most clearly with their refusal to help in the bailout of Long Term Capital Management (LTCM). As the FED organized the bailout of LTCM, all contacted competitors helped, only Bear Stearns refused despite the millions of profits earned as LTCM’s prime broker. Instead Bear even called in a short-term debt in the amount of $500 million. Later they suffered the same fate with JP Morgan Chase defaulting them when their own liquidity became into difficulties. This culture of ignorance regardless of the consequences can also be found Cioffi’s strategy to even increase leverage in his trades, when the market continued to turn disastrously against the fund. Also, any objections by top-level executives like

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