Executive summary

The aim of this paper is to evaluate and critically discus the fall of the investment bank Bear Stearns. Moreover, the first part of this paper will explain the reasons of the demise of Bear Stearns. Actually, some of the reasons of the demise are: the rejection of taking part in the bailout of the LTCM, the introduction of hedge funds such as Bear Stearns Asset Management (BSAM) and Everquest Financial, the seizure of $400 million by Merrill Lynch, the inappropriate use their cash capital, the decrease of their stocks prices, the increase of their debts and many bad movements of Bear leaders against rumors. Afterward, this paper endeavor is to explain the lessons learned for risk management throughout the case of Bear Stearns. The recognition of uncertainty in decision-making and evaluation and analysis of situations explains risk management. From the case one should have understood that Bear Stearns has faced risks of credit risks, market risks and liquidity risks. Moreover, the paper explains the liquidity market perceptions. Liquidity is explained as the ability to change assets into cash. Additionally, this paper provides the reader with some recommendations due to different time periods of the Bear Stearns crisis. One crucial recommend given to this paper is that Bear should be more emphasized in training their employees and after that they should create strategies of risk managing. Eventually, this paper shows managerial carelessness to tackle different challenges in different crisis time.

Table of Contents

Executive summary ................................................................................................................................. 1 Introduction ............................................................................................................................................... 3 What are the major reasons for the demise of Bear Stearns? .................................................... 3 The lessons learned for risk management from the Bear Stearns case. ................................. 5 How is the market perception of liquidity ......................................................................................... 6 If you were the CEO of Bear Stearns, what would you have done differently? ........................................... 7 In the early 2000s...................................................................................................................................... 7 During the summer of 2007 ...................................................................................................................... 7 During the week of March 10, 2008 ......................................................................................................... 7 Conclusion ..................................................................................................................................................... 8 References:................................................................................................................................................ 8

Introduction

The global economic crisis caused the disorder of the welfare of people's lives throughout the globe. The changes made the banking system to deteriorate and to force more banking institutions to change strategies of operations to till the point that some declared bankruptcy. One can ask that is it happening something like the Great Depression? Could the crisis of the 21st century be compared to the Great Depression? Either, one can argue that Investment Bank Bear Stearns has survived the Great Depression, on the other hand, why Bear Stearns has failed to be successful also in other crises, much less be the initiator of the 2000s crises. Is this Bank the initiator of crisis problems? Moreover, this paper will try to explain and provide the reader with useful information about the reasons of the Bear Stearns demise, what are the major factors of this fall and critically evaluate lessons learned for risk management throughout Bear Sterns case. Therefore, how the liquidity is perceived to the market in the investments banks and to manufacturing or distribution businesses. Moreover, this paper attempt to bring some advices how should the Bear leaders act in the crisis time in order to avoid the downfall. How one could act differently?

What are the major reasons for the demise of Bear Stearns?

Known as a strong investment bank, Bear Stearns proved its unfailing power in many crises. Thus, one may have asked that could a bank like Bear Stearns fall. Therefore this paper will explain some of the reasons for the demise of the Bear Stearns Investment bank. The problems of the company began when the Bears leader will be called by U.S Federal Reserve in order to bail out the Long Term Capital Management (LTCM) in that way to preserve the market stability which was faced with many problems; this request was rejected by Bear being the only bank among many others who had ignored the call from the Fed. Moreover, Bear sees the competitors using hedge fund industry and in 1990s started its own fund strategy called Bear Stearns Asset Management (BSAM). Oppositely from the others Bear hired specialized managers in different security or asset. One important think to mention in this part is the internal fund by Ralph Cioffi, the High-Grade Structured Credit Strategies Fund, which was proved as an unsuccessful strategy thus causing serious losses to the firm and sent it on large debts. Cioffi continually tried to rectify his mistakes in the market by introducing a new fund called Everquest

Financial, which was later discovered by Wall Street Journal journalists that it was "toxic waste" of mortgage securities, which prompted Bear to cancel this product offers (Abelson, M. 2010) Furthermore, a seizure of $400 million by Merrill Lynch and a reckless movement of Bears leader to save the image in the eyes of others by introducing $ 1.6 billion bank capital in support of hedge funds made the Wall Street Journal to charge Caynes as irresponsible for the actions of the firm, leaving it restored to satisfy his personal interests an created a bad reputation of Bear to Wall Street. In addition, in the last months of 2007 Bear tried to correct its mistakes, but these efforts were unsuccessful enabling us to state that there was calm before the storm picked this company. One of the main actions taken by the firm in this period of the year was to find a potential buyer of some stocks of the company in order to raise the company value, and the change of the CEO position from Cayne to Schwartz. Furthermore, when the bank thought that in beginning months of 2008 they could create stability with $21 billion in cash reserves were confronted with unsatisfactory and unfavorable situations inside the firm (Burrough, B. 2008) In addition, a strong fist hit this company when in March the Moodys rating company downgraded 163 tranches of mortgage-backed bonds of Bear. This rating created more rumors against Bear causing many problems to the bank because some of their partners were withdrawing their money from the Bear banks creating illiquidity to this firm. Moreover, based on the rumors against Bear, banks as Credit Suisse and Goldman Sachs informed their traders to hold up any transaction with Bear Stearns Bank. As wall as, with these problems the firm was faced also with internal problems with their employees which ones started panicking about the company life. Bear executives were trying to keep employees calm and make them working hard in order to survive the falling trend of their stocks. Stocks of Bear continuously were falling with a 15% within a day in March of 2008, this falling trend created controversy among executives. Moreover, a light at the end of the tunnel is seen for Bear in the second Friday of the March when the Fed and J.P. Morgan after many disputes agreed to enter into contracts that J.P. Morgan could access to the Fed discount window in order to offer Bear $ 30 billion credit for a period of 28 days. This opportunity that was offered to Bear became impossible when Treasury Secretary Henry Paulson and New York Federal Reserve President Timothy Geithner called Bear CEO Schwartz on Friday night by showing that the credit would expire on Sunday night. This 48 hour time period envisaged that the company must find a buyer or on the other hand to declare bankruptcy. This deadline forced Bear leaders to accept any offer in order to keep the firm alive. In addition, only one firm was able to buy such as firm, so after many evaluations of J.P. Morgan to the firm, their chief Braunstein offered a buying price of $2 per share. Bear leaders faced without any other solutions were forced to accept that offer. With the 97% discount within two days from $32 to $2, the 85 years old bank, Bear Stearns crumpled.

The lessons learned for risk management from the Bear Stearns case.

Every decision that a person make in banking industry have to have in mind that is taking risk. Risk is everywhere in decision-making especially in banking industry and in investment banks. Everyone has its responsibility for his/her risk decisions. One can raise the question how bank employees and traders manage their risk when they have to face it every day? Hence, risk management understanding is a crucial think when someone works in a banking industry. Risk management is the evaluation, analysis and the recognition of uncertainty in decision-making (Investopedia, 2013). Risk might be in different way but this paper aim is to provide the reader with a short lesson of financial risk management. Perpetually, having in mind our case company Bear Stearns the paper will enlighten the risk management level of this firm. Many banks across the world ceased to exist, many authors these bank falls links with mismanagement of risk. Many bright mind of the economic world linked the collapse of many banks around the world and the collapse of the whole Iceland banking system with undevelopment of risk management, they quoted that in order to achieve financial stability world economy needs a more integrated risk management. Moreover, Bear Stearns in the last years of its operations faced many problems with risk management, firstly they faced problem with the risk called credit risk which ones occurred when bank was issuing unnecessary investments from the same asset, then bank met the market risk which means the movement in the exchange rates, stock index, and interest rates and moreover the overall firm stock price change (Considine, G. 2008). Furthermore, these risks taken by the company had created a domino effect because of one mistake in the decisions-making by the company without exploring the possibilities of failure; the company was falling every day. Firm tried to rectify its mistakes taking even greater risks, thus causing constant trouble without positive results. In addition, a mismanagement of risk pushed the Bear to have liquidity problems when many of its clients were withdrawing money or holding up their contracts with Bear Stearns. Additionally, one can argue that mistakes made by Bear started in 90s when they refused to bail out LTCM hedge fund, and after that they created bad public perception by showing non-collaborative manner in solving global problems to prevent crisis. Moreover, high involvement on issuing mortgages in the period of the credit crisis when they easily securitized mortgages and creating higher-risk mortgages or subprime loans. Like many companies also Bear was included to the hedge fund industry so they took more riskier decisions by creating 100 x leverage funds like High-Grade Structured Credit Strategies Fund. Risk management failed to the Bear Company as well at the time when executives were trying to obscure the problems taking riskier movements by using the remaining capital. In that time and

also after the collapse of the Bear Stearns many authors, journalists and economists were accusing firm leaders for fraud. Thus, the Wall Street people were following their actions and have founded that Bear had no specific plans and strategies to manage the risk, thereby certifying that the decline of this company is caused by a lack of accountability and risk miscalculations that means lack of trained staff to deal with the risk. ( Sherman, B. 2011). Moreover, in particular investment banks have to lower the leverage ratio which in turn brings less profit in short term but in the long term keeps the banks on its feet. Finally, lessons learned from Bear Stearns are very significant for every investment bank to know that without trained staff and specific strategy of managing risks could not operate correctly in a banking industry

How is the market perception of liquidity

In business is important to know about liquidity, since all business deal with liquid assets and have to know how to manage the liquidity of their firms. Liquidity is the opportunity to turn assets into cash, so is the available amount of capital for investment and spending. Thus, the availability of a huge amount of capital means high liquidity, which has impact in the decrease of the interest rates allowing investments to increase and encourage economic growth (Amadeo, K. 2010). However, in terms of liquidity perception there are some differences between investment institutions perceptions and manufacturing or distribution business perceptions. One says that in terms of investment liquidity is the capability to convert an investment portfolio into cash without any loss in its value, on the other hand the liquidity is the ability to convert assets into cash in short-term obligations, so the ability for a person or organization to take their money whenever they need it (The Economic Times, 2013) (Business Dictionary, 2013). Moreover, in manufacturing and distribution businesses liquidity is taken as an event through that entrepreneurs and managers linked their managing behavior having in mind the flexibility use of the activities (Stuart, T. et al, 2003).According to Ben-Caleb, the liquidity has low impact on the overall profitability in manufacturing, it affect much more the risk management strategies (Ben-Caleb, et al. 2013). Furthermore, the financial term of liquidity occurs jointly with the risk in corporate when it comes to bankruptcy which is caused by the inability to pay back debts (Eugene, B. 1999). In addition, related to our case with Bear Stearns one can say that important example of liquidity in financial market is LTCM in 1998 when this strategy created less-liquid instruments, causing major losses of this strategy by spread in the credit and creating hedge fund which led the economy to a credit crisis (Longstaff, F. 2002).

If you were the CEO of Bear Stearns, what would you have done differently?
In the early 2000s

Bear Stearns started having managing problems before 2000. One significant problem might be the following of the LTCM strategy of credit issuing. Since 2000 as a CEO of a large and well known company one could take some crucial steps in order to be successful. As the economy was faced with the danger of coming crisis the management first step to undertake should be to train their employees and teach them how to cope with the risk that was coming. Moreover, when in an economy that is not stabilized and is on the verge of a global crisis, companies operating in that economy should be prepared for bad events and be ready to face the problems that occur with the crisis. Bear executives did not care at that time for further consequences of not taking concrete decisions regarding the issue; they simply continue to lose money trying to improve the company's previous mistakes.

During the summer of 2007

During the summer of 2007 Bear was having problems with their funds created by Cioffi which ones led the company to lose a big amount of capital. Inevitable is to say that in this period of time the CEO of Bear should try to improve how others saw the firm because many journalists were writing against Bear. Thus, the leaders of the firm should take into consideration that a bad appearance to the others will kill them in terms of holding cash because everyone started withdrawing money on their accounts to Bear Stearns. As CEO would be preferable to sell some of their stocks and create liquidity in order to pay its debts and create stability inside the firm. They have tried to sell 10% of stake to Allianz SEs Pacific Investment Management CO. but this transaction failed. Moreover, one can argue that Bear CEO should not take any action for a period of time in that way they could create stability and work hard inside the company by watching and planning strategies of operations, so when they prepared a consolidated strategy through it to the market and not taking actions under the influence of earlier mistakes.

During the week of March 10, 2008

Considering the earlier mistakes made by Bear, the expectations were not positive for the week of March 10, 2008. At the beginning of the week at March 10(Monday) Bear was rated down with 163 tranches of mortgage-backed bonds. In this situation was expected that the media will react and write about this fall, thus CNBC published on the noon news this fall as Bear stock has fallen by 10% to $63. An unwise movement of the Ace Greenberg was when he anxiously tried to hide this truth to legitimate what was happening in the company. Moreover, in this week Bear was faced with plunge of their stock price and an increase on their debt. Another mistake made by the executives of the Bear was the one of the CEO Schwartz who accepted to be interviewed by the CNBC correspondent David Faber on the Wednesday of that week; he fell in the trap of some questions of Mr. Faber, leaving the public to understand the grave situation of the company at that time. Generally, these actions led the Bear Stearns to seek buyers or otherwise to declare bankruptcy. If company leaders will not react against rumors, leaving the public and partners to understand that this company was in big trouble maybe many of the problems that occur in the week of March 10, would not be displayed so quickly, leaving sufficient time needed for the company to react to previous errors. Thus, one can argue that mismanagement was a crucial reason of Bear Stearns fall.

Conclusion
It is clear, that Bear Stearns investment bank has demise for many reasons, knowing that this paper explained some of these causes which are due to a mismanagement of the company and an irresponsibility of the executive leaders to deal with the company problems appropriately. As was previously stated, Bear Stearns risk management was not treated in a proper way, thus causing different problems to the bank. Moreover, Bear could not be able to improve itself in crisis time and in the same time being competitive with others, thus because they were faced with lack of operation strategies. Eventually, in many different points in time they tried to improve themselves but this paper conclude that they have used wrong strategies to cope with their crisis issues.

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