Research title: ‘The Tip of the Ice Berg: JP Morgan Chase and Bear Stearns; A study in to

the financial catastrophe of 2007-2008 which led to the downfall of Bear Stearns and how
JP Morgan emerged as a strong player to bailout the deceased Bear Stearns’

Date: 18th September, 2015

1
Statement of Originality and Authenticity
 
I confirm that the dissertation I am submitting is an original and authentic piece of work
compiled by myself that satisfies the University rules and regulations with respect to Plagiarism
and Collusion.  I further confirm that I have fully referenced and acknowledged all material
incorporated as secondary resources in accordance with the Harvard System.
 
I also clarify that I have taken a copy of the dissertation, which I will retain until after the Board
of Examiners has published the results, and which I will make available on request in pursuance
of any appropriate aspect of the marking and moderation of the work within the University
Regulations. I also confirm that I have considered the University Policy on Research Ethics and
discussed this issue with my Supervisor.
 
Name: Raj Rathore
Registration: 149055451
Course: MBA- Finance
Date: 18th September, 2015

Raj Bheem Singh Rathore

2
Acknowledgment
‘Live as if you were to die tomorrow. Learn as if you were to live forever.’ – (Mahatma Gandhi)

During my course of time, I have learned a lot from the people around me for which I would like
to thank all of them for their immense support.

Firstly, I would like to thank God who gave me the courage to complete my dissertation with full
confidence.

I would like to express my sincere thanks to my supervisor, Neal Lennox,whose encouragement,

supervision and support enabled me to look at the various aspect of my topic of selection and
constantly improvise my study over the span of three months. I have learnt a lot from him and
tried my best to show case that in my writing.

I would like to express warmth and appreciation for my MBA program head Karen Wharton
who was always ready to help me during my sickness.

My world is incomplete without her and that’s my mom who has been living alone back home
for than a year now. I would like to appreciate all the struggles, hardships and sacrifices which
she has made for my betterment.

I am heartily thankful to my sister Kamakshi Rathore Lakhani who was always willing to help
and give her best suggestions. I was able to structure my analysis in the best way only with her
critical comments and constructive suggestions.

I would like to thank the management of the University of Sunderland for their valuable
support and help.

I would like to take an opportunity to thank all my friends, my brother in law, uncle, aunty and
my grandparents for all their support and blessings.

3
Last but not the least, I affirm my renewed thanks to everyone who in one-way or the other
helped me to complete this dissertation. I deeply acknowledge every help with great gratitude.

Raj Bheem Singh Rathore

Abstract
In the study of ‘The Tip of the Ice Berg: JP Morgan Chase and Bear Stearns; A study in to the
financial catastrophe of 2007-2008 which led to the downfall of Bear Stearns and how JP
Morgan emerged as a strong player to bailout the deceased Bear Stearns’, it has been identified
that JP Morgan has made a huge profit by undertaking Bear Stearns. A detailed discussion as
well as analysis has been made on the basis of the post-positivism philosophy and deductive
research approach. At the same time, the descriptive research design has helped to discuss the
matter of the research in detail.

As per the literature review of the study, the credit crunch and subprime mortgage lending were
found as the main reasons behind the global financial crisis in 2007-2008. The global financial
position was at dynamic growth stage before the crisis took place. However, excessive trading on
CDOs, CDS and mortgage-backed securities influenced that global financial crisis. During 2007-
2008, the financial position of JP Morgan was much stable and its share price was above the
S&P index. On the other side, the US government and the Federal Reserve took several steps to
manage the financial crisis in 2007-2008.

During the quantitative data analysis, it has been found out that the strategies taken by Bear
Stearns during the financial crisis in 2007-2008 were not suitable and very much ineffective. The
financial position of Bear Stearns was also not that much stable before the global financial crisis.
On the other side, the undervaluation of Bear Stearns done by JP Morgan provided huge profit to
JP Morgan and it has positively affected the financial position of JP Morgan. However, as per the
qualitative data analysis, it has been understood that gaining more market share and more fund

4
were the main strategy behind managing the bailout of Bear Stearns by JP Morgan. It has also
identified that JP Morgan has faced some challenges due to worst financial position of Bear
Stearns and investigation done by the US government.

However, for the better future of JP Morgan, the organization must take care of its employee
retention. Along with that, the company must try to decrease its trading on CDOs, CDS and
mortgage-backed securities and must try to decrease the rate of financial exposure. On the other
side, a future scope is there to identify the effects of global financial crisis in 2007-2008 on the
financial or business positions of the other companies.

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Contents
Statement of Originality and Authenticity.......................................................................................2

Acknowledgment.............................................................................................................................3

Abstract............................................................................................................................................4

Chapter 1: Introduction..................................................................................................................11

1.1 Introduction.........................................................................................................................11

1.2 Background of the study..........................................................................................................12

1.3 Rationale of the study..............................................................................................................13

1.3.1 What is the issue...................................................................................................................13

1.3.2 Why it is an issue..................................................................................................................13

1.3.3 Why it is an issue now..........................................................................................................14

1.4 Research objectives.................................................................................................................14

1.5 Structure of the study...............................................................................................................15

1.6 Summary..................................................................................................................................17

Chapter 2: Literature Review.........................................................................................................18

2.1 Executive summary.................................................................................................................18

2.2 Comparison between the previous research work and the existing research work.................18

2.3 Conceptual framework.............................................................................................................19

2.4 Reasons behind the financial crisis of 2007-2008:..................................................................20

2.5 Condition of the world economy before the financial crisis period of 2007-2008:.................22

2.6 Global economy during the financial crisis of 2007-2008:.....................................................24

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2.7 Impacts of 2007-2008 financial crisis on the economies of different countries......................25

2.8 Conditions of Investment banks in US during the financial crisis period in 2007-2008.........26

2.9 The reasons for the sustenance of J P Morgan:.......................................................................27

2.10 Competitor analysis of JP Morgan and other banks during the crisis...................................28

2.11 Explaining how much Bear Stearns was exposed to the short-term money market and
mortgage backed securities during the crisis period:.....................................................................29

2.12 Comparing Bear Stearns with JP Morgan:............................................................................31

2.14 New policies launched to control the financial crisis, 2007-2008.........................................33

2.15 CDO’s, CDS, Mortgage backed securities and Hedge funds:...............................................34

2.16 Summary................................................................................................................................36

Chapter 3: Research Methodology................................................................................................37

3.1 Introduction..............................................................................................................................37

3.2 Method Outline........................................................................................................................37

3.3 Research Onion........................................................................................................................38

3.4 Research Philosophy................................................................................................................39

3.4.1 Justification for choosing the research philosophy...............................................................39

3.5 Research Approach..................................................................................................................40

3.5.1 Justification for choosing research approach........................................................................40

3.6 Research Design......................................................................................................................41

3.6.1 Justification for choosing research design............................................................................41

3.7 Data collection method............................................................................................................42

3.8 Sampling technique.................................................................................................................42

3.9 Sample size..............................................................................................................................43

3.10 Data analysis technique.........................................................................................................43

3.11 Ethical issues.........................................................................................................................44

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3.12 Time horizon..........................................................................................................................45

3.13 Summary................................................................................................................................46

Chapter 4: Data analysis and findings...........................................................................................47

4.1 Introduction..............................................................................................................................47

4.2 Quantitative data analysis........................................................................................................47

4.3 Qualitative data analysis:.........................................................................................................59

4.4 Summary..................................................................................................................................61

Chapter 5: Conclusion, Objective linking and Recommendations................................................62

5.1 Conclusion:..............................................................................................................................62

5.2 Objective Linking....................................................................................................................64

5.3 Recommendations:.............................................................................................................66

Reference list:................................................................................................................................71

Appendices:...................................................................................................................................80

Appendix 1:...................................................................................................................................80

Appendix 2:...................................................................................................................................80

Appendix 3:...................................................................................................................................81

Appendix 4:...................................................................................................................................85

8
Figures:

Figure 1: Structure of the Study.....................................................................................................15

Figure 2: Conceptual framework...................................................................................................19
Figure 3: Reasons behind financial crisis......................................................................................20
Figure 4: Chain of events which lead to financial crisis................................................................22
Figure 5: Total exposure of losses from subprime mortgages in the US.......................................30
Figure 6: Research Onion..............................................................................................................38
Figure 7: Research Philosophies....................................................................................................39
Figure 8: Research approaches......................................................................................................40
Figure 9: Research designs............................................................................................................41
Figure 10: Gender of Employees...................................................................................................47
Figure 11: Age group of the employees........................................................................................48
Figure 12: Employees’ perceptions regarding the financial condition of Bear Stearns during the
crisis period in 2007-2008.............................................................................................................50
Figure 13: Employees’ perceptions regarding the effectiveness of the strategies of Bear Stearns
during the crisis period in 2007-2008............................................................................................51
Figure 14: Employees’ perceptions regarding the reasons behind financial crisis in 2007-2008. 53
Figure 15: Employees’ perceptions on the profitability for JP Morgan on undertaking Bear
Stearns............................................................................................................................................54
Figure 16: Employees’ perceptions regarding the valuation of Bear Stearns’s share at the time of
purchase by JP Morgan..................................................................................................................56
Figure 17: Changes happened in JP Morgan.................................................................................57
Figure 18: The major categories of intervention by the Federal Reserve board...........................65

9
Tables

Table 1: Gantt Chart......................................................................................................................45

Table 2: Gender of employees.......................................................................................................47
Table 3:Age group of the employees.............................................................................................48
Table 4: Employees’ perceptions regarding the financial condition of Bear Stearns during the
crisis period in 2007-2008.............................................................................................................49
Table 5: Employees’ perceptions regarding the effectiveness of the strategies of Bear Stearns
during the crisis period in 2007-2008............................................................................................51
Table 6: Employees’ perceptions regarding the reasons behind financial crisis in 2007-2008.....52
Table 7:Employees’ perceptions on the profitability for JP Morgan on undertaking Bear Stearns
.......................................................................................................................................................54
Table 8: Employees’ perceptions regarding the valuation of Bear Stearns’s share at the time of
purchase by JP Morgan..................................................................................................................55
Table 9: Changes happened in JP Morgan...................................................................................57

10
 Chapter 1: Introduction

1.1 Introduction
In recent years there has been series of modulation in the financial markets which has
significantly transformed the view of finance and likewise has also changed the environment of
investment banking. The doors have been opened in the United States since the deregulations
have been introduced resulting to various affiliations which has helped in fuelling up the
economy by opening the doors to globalization. In today’s fast growing business world
investment banks plays vital role in facilitating both private as well as public transactions for
governments, multi-national corporations and public. The competition scale in investment bank
is high, hence to sustain in the competitive environment it is essential for an investment bank to
provide one-stop financial store (Liaw, 2012). However, financial conglomerates compromise
both commercial banking services as well as investment banking services which marks them to
be one stop shopping zone.

The investment banking market has experienced dramatic changes when the sub-prime crisis in
the US put the subsistence of many banks on the Wall Street at stake resulting in bankruptcy.
Over the past decade, Lehman Brothers and Bear Stearns were the only two top investment
banks of Wall Street which faced the entire crisis fearlessly which included the Great depression
of 1923, World War II and also managed facing the stock market crash of 1987, however failed
to sustain itself from the sub-prime crisis of 2007-2008. In September 2008, the demise of
Lehman Brothers and Bear Stearns, a sprawling global bank nearly brought the world’s financial
system down (The Economist, 2013). The bursting of the housing bubble forced banks to pay off
hundreds of billion dollars in bad loans as the damage was caused by the delinquencies in
mortgages which made them bankrupt by also causing decline of more than twice in their stock
market capitalization (Brunnermeier, 2009). Post the attacks of 9/11, the Federal Reserve’s has
already loosened their money supply and that was the time when the mortgage boom occurred
which led to the financial crisis of 2007-2008. The constructed plot began to thicken when the
subprime mortgages were lend to investors having poor credit history for which they failed to
repay the loan amount hence resulting in defaults (Skandera, 2015). In 2007-2008, US financial

11
markets was heavily polluted by mortgage backed securities an exotic financial instrument which
created a downturn in the US home prices which eventually brought the strong player Bear
Stearns down, when its two major flagship hedge funds High Structured Credit Strategies Fund
and High Grade Structured Credit Enhanced Leverage Fund collapsed. This hasty collapse of
Bear Stearns imparted firms on Wall Street a warning lesson of poor risk management which
could result in losing confidence of the investors in a jiffy.

In this study, the researcher has identified the reasons behind the global financial crisis in 2007-
2008 and explained the ways through which the JP Morgan played a vital role to manage the
bailout of the troubled Bear Stearns bank. For this, the researcher has chosen the topic ‘The Tip
of the Ice Berg: JP Morgan Chase and Bear Stearns; A study in to the financial catastrophe of
2007-2008 which led to the downfall of Bear Stearns and how JP Morgan emerged as a strong
player to bailout the deceased Bear Stearns’. In this introduction chapter, the researcher
introduces the whole study by explaining the rationale, aim and objectives of the research. With
this, the researcher also throws light on the research background with problem statement and the
structure of the study.

1.2 Background of the study

According to Brunnermeier (2009), the period 2007-2008 was the cursed period in the global
economy. Due to this financial crisis, the global economy faced huge losses maximum of which
were unrecoverable. Financial experts share view for the causes of this terrifying financial
breakdown in the global economy which some believe it happened with the result of complexity
of the financial products and high risks involved in it whereas some believe that the crisis was
due to the failure of the regulatory bodies and the credit rating agencies. However, at the same
time other financial analysts say that due to the secret conflicts between the financial institutions,
the global financial crisis aroused. On the other side, according to the Financial Crisis Inquiry
Commission, the global financial crisis occurred due to the credit crunch and the lending of sub-
prime mortgage. It was also the views of some financial experts that the lack of operation
transparency and the inclusion of risky investment and borrowings brought the financial crisis in
the global economy (French et al. 2009).

12
Before the crisis situation in October 2007, the industrial average index of US stock market at
Dow Jones reached to 14000 points but after financial crisis that is in October, 2008 that index
declined and reached to 6600 points. During this time, one of the oldest investment banks in US-
Bear Stearns was highly affected in global financial crisis and recession by which it failed to
perform and eventually management of the bank decided to merge with JP Morgan.

Therefore, due to the global financial crisis, the world economy not only faced the decrease in
GDP rate but also faced unemployment and huge debt. In case of US banking sector, it was quite
shocking that Bear Stearns, which was one of the largest and oldest investment bank, got
smashed. The Wall Street turned out to become a dire place continues decline in profits, losses
rising and increasing unemployment day by day. However, even in this situation, JP Morgan
saved the bank very effectively. Hence, it is very important to find out the main reason due to
which the global economy has affected vastly. Along with that, it is also necessary to identify the
ways by which JP Morgan proved itself in managing the bailout of Bear Stearns, so that it can
help the other companies or organizations in coming future (Crisafulli, 2009).

1.3 Rationale of the study

1.3.1 What is the issue

After studying and reviewing several books and journals articles, it is very clear that the global
financial crisis has affected the world economy and pushed it to the huge problem. However, the
main issues exist in identifying the actual reasons behind the global financial crisis and
identification of the ways through which JP Morgan became successful in managing the bailout
of Bear Stearns in that financial crisis period, when maximum business firm wereshattered. As
reasons and ways are not clear, many people give different views regarding the reasons of crisis
and the ways that JP Morgan applied. On the other side, if the main technique or way is not clear,
then it is much difficult for the other organizations to apply that technique to save them in this
type of global financial crisis.

13
1.3.2 Why it is an issue
In the above point, it has been stated that finding out the actual reasons and the ways or
techniques of global financial crisis are the main issues of the world economy and of this
particular research. These are the major issues for the world economy because if the actual
reason of crisis and the way of managing the situation become unknown to the people or
financial institutions, then there is a likely chance to repeat the same situation again.

For example, if the management of Bear Stearns bank knew the reasons for which the financial
crisis may affect their business then they could have taken prior necessary steps to save
themselvesfrom the crunch. On the other side, if the management of the same bank knew the
ways to protect them, then they could have maintained its liquidity for the position to face the
crisis rather than turning to be insolvent and bankrupt.

1.3.3 Why it is an issue now

The above-mentioned issue became a vital issue in the present days’ situation because the global
economy is not stable still now. The world economy is still in the process of the recovery of
global financial crisis. The post-crisis adjustment is going on. The expansion of world economy
is taking place at an uneven pace.

For example, in the financial year 2014, the growth of WGP (World Gross Product) was 2.6
percent, which was bit better than that of 2013 (2.5 percent). However, the world economy
botched to reach to the standard growth rate that is 2.9 percent. Therefore, it can be said that,
presently the global economy is in very sensitive situation. In this type of situation, it is very
important to know the actual reason that may affect the world economy in a negative manner so
that necessary steps can be taken to prevent this type of crisis. On the other side, proper
understanding of the strategies that JP Morgan applied in managing the bailout of Bear Stearns
can help the other organizations to fight the crisis and could help the firms to avoid future
obstacles (Helleiner, 2011).

1.4 Research objectives

In case of this particular research study, the researcher has some objectives and those are stated
below:

14
  To identify the situation of the global economy before the global financial crisis situation
aroused.
 To identify the actual reasons behind the global financial crisis in 2007-2008.
 To identify the role played by Government and Federal Reserve’s during the financial
crisis.
 To identify and analyse the accurateness of the strategies those were taken by the
management of Bear Stearns to safeguard the bank during the global financial crisis in
2007-2008
 To understand the techniques or strategies that JP Morgan applied to manage the bailout
of Bear Stearns

1.5 Structure of the study

Chapter 1:
Introduction

Chapter 2: Literature
Review

Chapter 3: Research
Methodology

Chapter 4: Data
analysis and Findings

Chapter 5: Conclusion
and
Recommendations

Chpater 6: Self-
Reflection

Figure 1: Structure of the Study

15
(Source: Created by author)

The structure of the research or study is the flow through which the activities of the research are
carried on. Structure provides a systematic way to conduct a research study. Therefore, it is very
important for every researcher to maintain a particular structure at the time of conducting a
research study. In case of this particular study, the researcher has followed the structure which
comprises of five different chapters. The chapters are stated below:

Chapter 1: The first chapter that is chapter 1 includes the Introduction part of the research
study. Here, the researcher introduces the overall research study. At the time of preparing this
particular chapter, the researcher states the research rationale, aim, objectives, questions,
problem statement and background of the study.

Chapter 2: Next that is chapter 2 includes the Literature review of the study. This is the most
important chapter in a research study. Here, the researcher explains the existing theories, models
and concepts those have been studied from the existing literature that is books, journals or
articles. This chapter helps to get the basic idea about the main theme of the research study.

Chapter 3: The third chapter is the Research methodology chapter. This chapter is the technical
guideline of the research. In this chapter, the researcher states the particular research philosophy,
approach and design that have been chosen for this research. At the same time, the researcher
also discloses the sampling technique, sample size, method of data collection, method of data
analysis, limitations of the methodology and the time horizon of the study.

Chapter 4: The fourth chapter is the Data analysis and findings. In this particular chapter, the
researcher analyses the data those are collected from several sources and finds out the result of
those analysis.

Chapter 5: The fifth chapter is the Conclusion and recommendation chapter. In this chapter,
the researcher concludes the study by linking the objectives with the findings of the study.
Adding on, the researcher provides some recommendations for the better future situation.

Chapter 6:This sixth chapter is self-reflection in which the researcher as will describe the
overall journey of the research. The self-development will be analyzed by the researcher relating

16
it with their MBA module. Issues and limitation of conducting this research also will be analyzed
in this chapter.

1.6 Summary

During this part of the study, the researcher has disclosed that the main aim of this study is to
find out the actual reason behind the global financial crisis and the strategies those were taken by
JP Morgan to manage the bailout of Bear Stearns during the global financial crisis in 2007-2008.
It can be said that this chapter serves the role of introducing the overall dissertation in brief. At
the same time, the researcher also disclosed the rationale, objectives and questions of the study.
Lastly, the researcher has stated the structure according to which the study will continue. The
dissertation structure that has been added here is actually providing the concept of the total
dissertation at a glance. Thus, it is known as one of the important chapters of the dissertation.

17
 Chapter 2: Literature Review

2.1 Executive summary

In this part, the research explains the condition of the world economy before and during the crisis
period. The research tries to ascertain the global economic situation after the financial crisis.
Adding on, the research investigates the reasons and impacts of global financial crisis. The
researcher highlights the reasons behind the financial crisis such as Credit Crunch and Sub-prime
Mortgage Lending. The researcher also explains the situation of Investment Banks in US and the
role played by Government and Federal Reserves in implementing new policies to solve the
financial crisis. Furthermore, the reasons of Bear Stearns failure have been identified by
understanding its exposure to the short term money market and mortgage backed securities
during the crisis period. This part also throws light on the reasons for the sustenance of JP
Morgan by carrying out JP Morgan’s competitor’s analysis. On its way to conclusion, the chapter
focuses on Collateralized Debt Obligation, Credit Default Swaps, and Mortgage backed
securities in relation to the banks. The researcher has also noted the mistakes made by Bear
Stearns hedge funds as it failed to perform in the market. Further research is carried by
comparing Bear Stearns with JP Morgan bank.

2.2 Comparison between the previous research work and the existing research work
In the previous research work, it has been found out that there were many different reasons
behind this global financial crisis in 2007-2008. In the previous researches, the researchers also
disclosed the impacts of global financial crisis in the global economy. However, the research did
not disclose the actual reasons that have affected the world economy mostly. On the other side,
the previous researches were also unable to identify all the areas those were affected by this
financial crisis. In this research, the researcher tries to fill this gap and identify the major reasons
behind this global crisis and all the areas those were affected by this crisis. The researcher has
also collaborated information on the bailout of Bear Stearns which was led by JP Morgan during
the crisis period.

18
 2.3 Conceptual framework

Global economic condition before

global financial crisis

Global financial crisis

Reasons for global financial crisis Impacts of global financial crisis

Credit crunch Role played by the

Sub-prime
government and the Federal
mortgage lending
reserves

New policies

Figure 2: Conceptual framework

(Source: Created by author)

19
2.4 Reasons behind the financial crisis of 2007-2008:

Credit
Crunch

Global
financial
crisis in
Subprime
2007-2008
mortgage
lending

Figure 3: Reasons behind financial crisis

(Source: Mishkin, 2011)

Helleiner (2011) commented that global financial crisis in 2007-2008 not only affected the
economies of developing countries but also had devastating impacts on the developed economies
as well. According to financial experts, there were several reasons behind this global financial
crisis in 2007-2008. However, according to Financial Crisis Inquiry Commission, the main
reasons behind the global financial crisis in 2007-2008 were the credit crunch and the sub-prime
mortgage lending. These two reasons are discussed below:

Credit crunch: The Financial crisis on 2007-2008 was marked by hasty freeze in the credit
markets which elicited worldwide liquidity shock (Kapan and Minoiu, 2013). However, before
the global financial crisis; the banks in the global economy were based on the funds of the
money market. These funds of money market came by the issue of commercial papers by the
large business organizations. Claessens et al. (2008), opined that in 2008, the withdrawal of $152
billion pushed the large business firms into big trouble and they became unable to rollover their
short-term debt. Before, 2007-2008, there was another credit crunch in the global economy in
1930 but that was not as much complex as the 2007-2008 credit crunch was. The main reasons
behind this complex credit crunch were the innovation of new financial instruments and the
techniques of packaging and reselling of assets (Elliott et al., 2010).

20
Sub-prime mortgage lending: In US, the loans were doled out to the subprime borrowers
having poor credit history for which they struggled to repay back the loan amount. These risky
investments were then passed to the financial experts of mainly big banks which managed these
funds to be supposedly less risky in form by setting large numbers of them into groups. Financial
engineer’s pooled works of each loan risk which was uncorrelated. The arguments made by the
financial institutions were that the different cities in America would rise and fall in parallel to
one another. However, this argument proved to be wrong, as in 2006 America experienced
nationwide house price slump (The Economist, 2015).

In December 2007, the sub-prime mortgage crisis started in the worldwide banking sector with
causing the recession in US. Cohen (2009), argued that the main reason behind this sub-prime
mortgage crisis was decrease in the home prices in United States, lending to the mortgage
foreclosure and delinquencies and due to the decrease in the value of the securities, those are
related to the housing sector. However, during the global financial crisis in 2007-2008, the high
recession in US economy decreased the investment values in the residential projects. Due to this,
the investments banks those invested in the housing projects faced huge debt during this period.
The lower quality subprime mortgage percentage increased tremendously by 8% within a year.
With this increase in subprime mortgages the housing industries rates in the US decreased to
30% severely affecting the economy (The Economist, 2015). During the crisis period, it was
estimated that the financial crisis in total cost the United States 40% to 90% of their one year’s
output, it was equivalent of $50,000 to$120,000 for every U.S. household (Atkinson et al., 2013).

21
Figure 4: Chain of events which lead to financial crisis

(Source: Thakor, 2015)

2.5 Condition of the world economy before the financial crisis period of 2007-2008:
Aizenman and Lee (2006) discussed that the economy of United States remained as the main
engine of the global economic growth. On the contrary, India, China and other Asian countries
reflected their dynamic growth on the global economy in the phase of 2006. Thereby, the global
economic growth gradually, decreased for the developed countries in the phase of 2005. As no
recovery expected on 2006. Additionally, the growth rate was stabilized to 3.1% for United
States of America and other European countries are ranged to 2.1% in the phase of 2006.
Further, Japan expected to grow its economic stability around 2%. In the year of 2000, the
developing economies have expanded its economic growth around 5.6%. East and South Asia
has expanded its economic growth rate around 5%.

22
Brunnermeier (2009) reviewed that the economic growth rate of Latin America is 3.9% and is
lagging behind with other European Countries. Further, African economic growth rate is
stabilized on 5%. On the other hand, the least developed countries have achieved an economic
growth rate of 4% in the phase of 2006. Financial crisis in the year 2007-08 the least developed
countries faced a huge upset. As the least developed countries are the importers of oil and
agricultural products. French et al. (2009), discussed that the employment in the worldwide
remained unsatisfactory. In the year of 2000-2001, the rate of unemployment was higher for
underdeveloped and developing countries.

Mishkin (2011) stated that the European countries have adopted the financial policy of 2000-
2006. Therefore, this policy helped the European Countries in the agricultural fields. On 6th of
May, the parliaments of Europe entered into a new inter institutional agreement. In the year
2004, the GNP resource of United States accounted up to 70%. Additionally, another decision
was taken to reduce all sources of export subsidies for cotton by the developed countries in the
operating year of 2006. United States conference recognized the importance of aid for trade to
help the underdeveloped countries and the developing countries. Therefore, this helped the
developing countries to improve their supply side and trade infrastructure. Further, World Trade
Organization (WTO) has taken initiative to help the developing countries to cope up with their
short-term cost adjustment.

In the year 2006, a concrete agenda set up by the European Union to negotiate all items in
‘DOHA AGENDA’. Further, the financial structure stabilized in the early phase of 2006, but the
middle period the economic condition failed miserably. Thereby, the World Trade organization
failed to meet the requirements to form a clear access for non-agricultural and agricultural
market. The stability of the economy continued to expand until the hike in oil price in the middle
stage of 2006. The price amounted to $75 per barrel in the mid phase of April. Therefore, for the
past few years the price of minerals and metals has continued to rise further. It was also noted
that the private flow of capital in the emerging market increased in the year 2005, therefore, this
momentum remained in the early phase of 2006. (Ivashina and Scharfstein, 2010)

23
2.6 Global economy during the financial crisis of 2007-2008:
The cause of the financial crisis occurred due to deregulation of the financial markets; however it
also noted that theeconomic recession would influence the growth of unemployment in the
market. Therefore, unemployment would give rise to financial crisis. Financial crisis would lead
to the major liquidity problems faced by the banks, thus in return this liquidity problems would
affect the insurance industry (Brunnermeier, 2009).

The financial crisis of 2007-2008 is also considered as a global crisis all around the world. This
threatened the world economically and affected the financial institutions, nationalized banks and
the stock market. The outcome of this crisis affected the standard of living. In this recession
period, the capital provided by the banks and the insurance companies turned out be
insolvent.Further, with the growing insolvency the liabilities rates increased for the nationalized
banks and other financial institutions. Through this occurrence, the stock market securities faced
a huge loss in 2008 and in the early phase of 2009. The worldwide economies collapsed during
this period and the outstanding payments of international trade declined (French et al., 2009).

Ivashina and Scharfstein (2010) stated that the central banks and the governments responded
with various monetary policies, institutional bailouts and fiscal stimulus. According to US, the
congress delivered the act of Reinvestment in 2009. In this series of events, various financial
institutions and the nationalized banks had appointed an inquiry commission to find out the
reasons behind this financial crisis. The inquiry commission stated that the current financial
crisis which affected the world could be reduced. The wide spread of financial crisis occurred
due to the failure of supervision and financial regulation. The initial start of the crisis period
started from mid of 2007, since then the downfall of economy continued and the big enterprises
failed miserably.

Tong and Wei (2008), stated that strengthen of currency would support the inflows of foreign
investments. Therefore, the combination of predictable and low interest rates would boost the

24
foreign capital to increase the stock market. Furthermore, the GDP of the countries gradually
decreased due to of this financial crisis of 2007-08. The house debt increased from 10% to
almost 30% during crisis of 2007-08.The value of Gross Domestic Products, Net Domestic
Products and Net Foreign Products gradually decreased (McKibbin and Stoeckel, 2010).

2.7 Impacts of 2007-2008 financial crisis on the economies of different countries

The executive compensations systems suffered to a huge extent because of inflation caused due
to the financial crisis of the year 2007-2008. The financial instability effected the growth of UK
largely during the year 2007-2008. The financial ministers have ensured growth of the nations.
People whose who were interested to purchase property had to give a huge amount due to
extensive price rise of the housing properties. However this did not stop the growth of inflation.
The demographics of the people in the UK had created huge impact on inflation due to different
cultural preferences. Needs and demands changed due to change in preferences of the customers.
Economic condition of UK failed to provide the necessities of the nation’s due to high increase
in production cost. In the UK, the unemployment rate increased from 5.4% in the year 2008 to
8.4% in 2011 due to the recession caused by the global economic crisis of 2007-2008 (Groom,
2010).

Similar types of steps were taken by the governments of France, Germany, Belgium, Ireland,
Spain, and Switzerland to save several of their illiquid and undercapitalized banks. The most
distressful condition was found from Iceland, Iceland lost its aggressive banking sector, in the
United States, total twenty-five banks was gone to water in the year 2008.

Hung (2008), opined that the transaction system calls for a change as a resultant of inflation.
Qualities of products generated were not as per standards. This was due to the effects of inflation
that the producers produce low standard products with an anticipation to earn high profits in
future. Increased inventory played a huge part in order to safeguard nations from the adverse
effects of inflation. Producers were inclined to preserve more stock of products for use in future
during inflation.

“Leh Man Brothers”, which was one of the best global bank was almost got washed in the
world’s financial system on September 2008, the bank took huge taxpayer financed bailouts to
shore up the industry, due to the bear steam the Mortgage-backed securities decreased in value, if
25
they could be valued at all. The researchers of the US economy commented that the safe CDOs
turned out to be worthless, despite the ratings agencies’ seal of approval. It was very difficult to
sell susceptive assets at almost any price, or to use them as collateral for the short-term funding
that so many banks relied on. high-sale prices, in turn, instantly made banks’ capital thanks to
“mark-to-market” accounting rules, which provide a requirement for them to revalue their assets
at current prices and thus to acknowledge losses on paper that might never actually be incurred
(Elliott and Treanor, 2013).

2.8 Conditions of Investment banks in US during the financial crisis period in 2007-2008

According to Brunnermeier (2009), the financial crisis of 2007-08 laid a heavy effect on the
status of the banks. The bailout of the investment banks could not prevent the dropout of the
stock market. US had a huge range of investment bank that contributed at the time of financial
crisis. Fannie Mae known as Federal National Mortgage Association stood to be a major player
lending huge amounts to the housing and infrastructure. Investment banks in the year 2007-08
used the financial innovation techniques for increasing the number of wagers, however it was
observed to be beyond the value of the mortgage loans. The investment banks situated in the
Wall Street fulfilled the demand of income generating investment with a lump sum number of
products. These products were mortgage back security, debt allegations collateralized that were
summarized to be providing safe ratings according to the agencies of credit rating (Levin, 2010).

Wall Street got connected to the mortgage market in US. In this process, it sold the loans to the
small banks that subsequently funded the brokers of the organizations. At the crisis period five
topmost investment banks of US faced bankruptcy resulting to its closure. These were Lehman
Brother, Bear Stearns, Merrill Lynch, Morgan Stanley and Goldman Sachs. Some of these were
bankrupted, some were sold at sale and some of them were transformed into commercial banks
(Mathiason and Stewart, 2008). The initial help has been provided by Barclays and Bank of
America but it could not save the banks from crisis .After the demise of the Bear Stearns due to
their liquidity problems and failure of two main hedge funds, later in two weeks Lehman brother
was on the edge of insolvency. Bank of America who was then a strong face of banks in the US
chose to takeover Merrill Lynch instead of Lehman Brother. Other struggling banks which were
Goldman Sachs and Morgan Stanley struggled till the end and converted them into bank holding

26
companies. Later in the year equity shares worth 21% was sold by Morgan Stanley to Mitsubishi
Japan’s largest bank in reason to avoid similar outcome like AIG (Cole and White, 2011).

2.9 The reasons for the sustenance of J P Morgan:

J P Morgan solely focused on the maintenance of its fund holders. Along with that, the corporate
setting had also been taken into account based on the share price and the profits. In JP Morgan,
the complex structures of the funds were being managed by the bank with the help of the large
scale mergers and acquisitions. Therefore, it can be said that the fund line up was well structured
in JP Morgan. However in support decisions were made on the fund line up of the fixed income
rate was decent to overcome the financial crisis. JP Morgan started the series of its acquisitions
in the year 2000. JP Morgan was first merged with chase Manhattan Corp. Later within a span
of4 years it merged with Bank One, a Chicago based bank. At the time of the financial crisis, it
preferred to buy the ailing firms Washington Mutual and Bear Stearns. During this time of
acquisitions done by JP Morgan helped the bank to swell up its revenues to $105 billion. The
Asset management division had also been shaped due to the growth caused out of the
acquisitions. Along with that, improvements were held in several issues like security operations
and shaping up of the mutual funds (Goldstein, 2008).

According to Brunnermeier (2009), added that the research budget of J P Morgan was kept intact
even during the downturn. It was found that the bank focused on hiring experienced accountants
and analysts in order to retain its sustenance at the time of financial crisis. The idea of
introducing new schemes and products in the bank helped the bank to retain its clients. Later in
the year 2005, JP Morgan speedily introduced 59 funds. The JP Morgan extended its motto of
client convenience by appointing 90 client managers those were given the responsibility of
explaining the new schemes to its customers. In 2008, the firm launched its JP Morgan strategic
Income Opportunities which was a return fund policy, helping the company in growing its stocks
to $11 billion (Crisafulli, 2009).

In 2009, JP Morgan also bought the asset management business High bridge Capital
Management. The asset management firm motivated the bank to encourage the concepts of
commodities and the strategies of market neutrality. The top level hierarchy in the management
moved the firm towards prosperity within their short tenures. The profits of the company were

27
doubled under the management of Jamie demon. The down turn of the firm was improved under
Dimon’s surveillance that helped the company to come up with such large acquisitions. Amidst
all such organizations, J P Morgan held its funds higher than the others did. JP Morgan stratified
its legacies regarding the private wealth. In such context, the company understood the fact that it
needs to maintain secrecy in terms of its customer’s portfolios. However, according to Jinwei
(2009), the reason sustenance of JP Morgan who managed to survive during the crisis was due to
its prudent internal control and use of proper risk management mechanism.

2.10 Competitor analysis of JP Morgan and other banks during the crisis
The financial strategies taken by the organization during the crisis period of 2007-2008, are
remarkable. During the financial crisis period, this particular organization faced several risks.
However, the stock price of JP Morgan during the financial crisis period was above the S&P
indices. In 2007, when JP Morgan’s stock price was $116.75 per share, S&P financial index was
$96.99 and S&P index was $122.16. Thisindicates that the stocks of JP Morgan were highly
risky at that time. The same thing has been continued by the organization until 2010 (Coviello,
2008).

Adding on, JP Morgan proved itself better from its rivals during the crisis, as when the thunder
struck in the second phase of the crisis year, JP Morgan just took losses on high risk CDO’s and
leveraged loans of $5 billion, whereas its competitors Citi bared losses of $33 billion, $26 billion
was of Merrill lynch and $9 billion at Bank of America (Tully, 2008).

According to Crisafulli (2009), during the financial crisis of 2007-2008, the exposure of JP
Morgan was $78.1 trillion. Whereas the exposure of Bank of America was $53 trillion and
exposure of Goldman was $48 trillion. Therefore, the exposure of the organization was also high.
However, Cohen (2009), stated that at the time of global financial crisis in 2007-2008, the risks
exposure of JP Morgan was worse that Bear Stearns however, the selection of JP Morgan to bail
out troubled Bear Stearns depicted the company’s hold in the market and also framed itself to be
a strong player by taking over the brokerage rival during the time when the firms in the Wall
street was stumbling to survive. (Refers to the appendix 1)

28
2.11 Explaining how much Bear Stearns was exposed to the short-term money market and
mortgage backed securities during the crisis period:
In the year 2008, the Bear Stearns an investment bank collapsed despite of getting support from
the Federal Reserve Bank of New York. According to Greenberg and Singer (2010), due to weak
risk management policies in the company Bear Stearns could not manage its financial matters.
The fact is that the reason for the loss of the bank was the nervous investors. The nervous
investors were the ones those pulled out shares out of the bank. At the initial stage, the bank had
total assets of $390 billion and an equity share of $11 billion. It was criticized to be a smaller
amount to fight with any sudden arrival of crisis. In the first quarter of 2008, Bear had a stock of
subprime mortgages. The fall was due to the distress created in the market as a result of the
mortgages. At the time of financial crisis, Bear Stearns was highly exposed to the short-term
money market and the mortgage backed securities in comparison to other banks (Fabozzi, et al.,
2011).

In addition to that, Bears faced a shortage of gold and silver on the COMEX. This was
considered to be another reason for the demise of the company. During the demise point of
Bears, the high prices of gold and silver were prevalent in the US market. Towards the end of
2007, the gold prices hiked from $800 to $1000. The silver prices also rose to $21 from $14.
Bear Stearns failed to keep the stocks for both the properties. At this time, Bears had to submit a
daily cover of adverse prices to live up to the regulations followed by all the participants of
COMEX.In case of Bears, the biggest short went under leading to the collapse of the bank.

Bears tried to operate more than one cases at a time. The mortgage backed securities were
turning rotten within the years. The properties stood to be unsold in the following years. Further
to it, the fluctuating rates of the houses made impossible for Bears to sell its shares. The hedge
funds were also counted to be the reason behind the company’s collapse. The fund managers of
the bank made several mistakes that led the company towards its closure. The fund managers
could not predict the accurate subprime bond market under the risky conditions. Therefore, it had
been assumed that the funds could not save it from losses. Bear Stearns also faced problems in
their debt allegations which were also not handled well by the fund managers strategically
(Waggoner, 2008).

29
The lack of liquidity defied the bank from retaining the market position. Since Bears did not give
up on the potential returns this impacted and resulted in loss of millions that belonged to the
investor. In the meantime, the risk models developed for the company could have been reviewed
but was neglected. The risk models should have included an unprecedented risk level which
included the part of the lenders to quality borrowers of low credit. In addition to that, according
to Bamber and Spencer (2008), the main flaw of the bank was to induct an inappropriate level of
leverage induced in the strategy. The default strategies which were introduced made the
company greedy to acquire more and more leverage. They charged an enormous amount for their
services which counted to be much more than what was expected. However, the company
believed that the profit rise with these alterations would fetch them 20% hike in profits, but
unfortunately it led to their demise (Greenberg and Singer, 2010).

Figure 5: Total exposure of losses from subprime mortgages in the US

(Source: Greenlaw et al., 2008)

30
2.12 Comparing Bear Stearns with JP Morgan:
Later during the crisis, the banking sector got to learn many lessons from the demise of big firm
Bear Stearns. Firstly, the stagnant leverages can be the vital reason behind the downfall of a
financial organization. The total equity in the year 2008 was $11 billion which had to support the
total assets of $390 billion. This reckless system managed to acquire a profit for several years but
at the time of crisis, it could not save Bear Stearns from ultimate demise. According to Thomas
(2013), Bear Stearns stock fell down to the lowest level of 11% having caused degrade of
portions of its holdings in mortgage bonds. Secondly, the investment banks that pay out money
should not be wholly dependable on creditors and regulators. Furthermore, the third cause of the
company’s downfall to be lack of strict regulation in terms of reducing the blow up causes and
managing the pollution taxes. In order to avoid loss to the global economy due to the downfall of
a single financial institution, government had come up with a common tax structure which
reduced the probability of these blow ups. Along with that, the tax must cover the costs of
institution specific losses (Bamber and Spencer, 2008).

In the year of 2007, the financial exposure of the bank was at a very high level. Further, due to
the instability in the subprime mortgage market, the organization became heavily exposed to the
market. The organization made loss of 23% on its Credit Strategies Enhanced Leverage Fund.
However, the bank started to sale its investments to minimize its exposure(Greenberg and
Singer, 2010).

Contrariwise, JP Morgan was regarded to be the wealthiest company in Wall Street even during
the financial crisis of 2007-08. It primarily focused on gaining equity shares and funds. With the
time passing, the company understood the importance of generating returns. It modified its risk
management policies in order to sustain itself during sudden financial outbreak. JP Morgan had
its structured spread throughout the line-up of funds. The strategic Income Opportunities was
another bold attempt by JP Morgan that took up its shares to $100 million (Tully, 2008).

JP Morgan had planned a clear picture for its future for which the bank worked on, as it had
hired new and experienced people to manage the present assets and pave the way for the next
few years. Cutting on the marketing funds, implementation of soft close and raising the
31
minimum were some of the trails performed by JP Morgan. Morgan’s excellent management of
fund line ups encouraged an independent working environment with Casey Quirk, a consulting
firm. Merging with the consultancy helped JP Morgan to improve and build transparent
relationship with its investor trustees and retained the absolute number of its performances. The
firm wide focus of JP Morgan had always been mainly in concern with the ‘risk’, as they
structured their funds to avoid blowups when the market crashes. Morgan had also planned in
preventing the funds from moving into overdrives at some point in the rally (Business Insider,
2011).

2.13 Role played by the government and Federal Reserves during the financial crisis in
2007-2008

Role played by the government during financial crisis in 2007-2008

According to Allen (2015), investments which were made by the government loans could not
match up to the level of investments made by the investment banks. Government in the year
2009 responded with the fiscal stimulus and policy of momentary expansion. Contradictorily,
another issue rose during the financial crisis was due to the regulatory practices of the
government, as the government was not convinced to adjust the regulatory practices in order to
manage the organizations and its debts. On the other hand, government was been able to bail out
some of the key financial regulations and economic stimulus programs to supplement the
funding process (The Daily Signal, 2015). In addition to that, the government allowed taking
funds from the foreign entities. Such attempts were highly encouraged by the economists. The
foreign companies in this context purchased treasury bonds of US companies. The investment
banks that faced bankruptcy in the year 2007-08 started getting support from the US government.
Lehman was an exception, as it did not get any financially support from Government. In
September 2008, Fannie Mae and Freddie Mac were formed to tackle the financially stricken
enterprises. It has guaranteed about $5 trillion for the obligations made for mortgages. The
finance collected from the tax payers in the year 2008 was used to clear the mortgages by the
government (Thakor, 2015).

32
Role played by the Federal Reserve during financial crisis in 2007-2008

During the financial crisis 2007, the response of the Federal Reserves was aggressive as they had
implemented various programs which were built to support the liquidity of financial institutions
and enhance the conditions in financial markets (Federalreserve.gov, 2015). The federal fund
rates were minimized at the time of the crisis in 2007-08. Due to the weak policies of the Federal
Reserve the financial crisis took place in 2007-08. The rates were reduced from 6% to 1% in the
year 2003 but it could not upgrade the crisis state. It helped to minimize the collapse of the dot
cum bubble and the losses caused due to terrorist attacks. The Federal Reserve was cutting down
on their expenditures. Federal Reserve Bank stressed on the blamed to the credit markets for the
crisis. Towards the end of 2009, all the asset backed issuance was supported by the Federal
Reserve’s. The TALF program of Federal Reserve helped the credit card and the lenders of small
businesses.

2.14 New policies launched to control the financial crisis, 2007-2008

The financial crisis was handled with the help of a new set of policies made for different entities
by the Government. The set of policies to mend the financial crisis were complex enough to
overcome the financial crisis. The policy encouraged the ownership of homes by simplifying the
rules of taking loans. Along with that, escalations of the housing prices were covered under the
new policy. Overvaluation of subprime mortgages was also included in the policy. Compensation
rates for the short term and long-term goals were re structured under the new policy. Helleiner
(2008), added that the prime motto of the new regulations were to manage the capital holdings
borrowed from the insurance companies and the banks. In the year 2010, palliative monetary
policies were adapted to manage the recent financial crisis. Hung (2008), noted that the
government relied upon the monetary economists to formulate the new policy. The independence
of the central banks was the prime motto of the new policy. The transparency between the policy
makers and the service users were another new regulation of the policy. The stability of the
financial system had been dedicated to the central banks.

33
2.15 CDO’s, CDS, Mortgage backed securities and Hedge funds:
CDO’s or also known as Collateralized Debt Obligation is one of the financial products that
collects the cash generating assets together and repackages them to discrete tranches, which can
be sell out to the investors. CDOs played a vital role in the global financial crisis in the years of
2007-2008. At that time, the banks like, Citibank, UBS and Merrill Lynch started to increase the
trade on CDOs. In the year of 2007, the total issue of CDOs by Wall Street was $700 billion,
which included mainly the mortgage-based securities. Due to this, the values of the CDOs started
to decline which eventually lowered the standards of lending. As a result, the financial market of
USA started to decline and ultimately, the financial crisis took place (Fabozzi, Berliner and
Bhattacharya, 2011). The managers of Bear Stearns opted for AAA- and AA- rated CDO’s
which carried subprime mortgages. The reason for choosing these CDO’s was to hedge their bets
on the subprime mortgage bonds by confirming to be the first in group of bond holders to get
paid once the amount was due. . The hedge funds managers extended their lines of credit which
were based on the valuation of CDO’s by which they in turn used this line of credit to purchase
additional CDO’s. However in the later period, the CDO market collapsed as billions of dollar
bonds were problematic collateral ones (Mishkin and Eakins, 2012).

On the other side, CDS or Credit Default Swap is kind of the financial swaps. In this type of
swaps, the seller compensates the buyer of CDS in case of default of loan or other credit. In the
other words, it can be said that by selling CDS, the seller insures the buyer of CDS against any
default loan or credit. The value of CDS and CDO’s depend solely on the underlying value of
mortgages. However, after the year 2003, the use of CDS in the banking sector started to grow
up. During the financial crisis period, the use of CDS became double and the notional value of
the CDS became $62.2 trillion. However, in the year 2008, the notional value of the CDS started
to fall down and at the end of the year 2008, the notional value of CDS fall down to $38.6
trillion. In the CDS market, JP Morgan, Bank of America, Citibank and Wachovia were ranked
as the top prayers contributing trillions of dollars together. The high number of defaults in
payment in the mortgage market mainly in higher risk sub-prime mortgage resulted the prices of
mortgages backed securities to drop precipitously (Spencer and Bamber 2008).

In the financial year of 2006, the over use of mortgage backed securities brought the global
financial crisis situation in 2007-2008. In the years of 2006 – 2008, there were mainly nine

34
largest banks those were highly operating their businesses on mortgage backed securities. The
names of the banks are - Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, Royal
Bank of Scotland, UBS, Deutsche Bank, Credit Suisse and Wells Fargo. The main reason behind
the financial crisis in 2007-2008 was the less transparency in the trading of mortgage backed
securities. Due to this, these nine banks faced detailed investigation by the US government on
the sales of mortgage backed securities (Financial Times, 2013).

Mistakes made by Bear Stearns Hedge Funds:

According to Logue (2007), hedge funds are defined as “A lightly regulated investment
partnership that uses a range of investment techniques and invests in a wide variety of assets to
generate higher return for a given level of risk than what’s expected of normal investments.”
Hedging is done to minimize risk in an investment scheme; however hedge fund managers
instead are the risk takers. It is proven that risk is directly proportional to returns, hence the
design of the hedge funds are based on its maximum return at a given level of risk significance.
Hedge funds played a crucial role in the sub-prime crisis of 2008. The sub-prime mortgages were
turned into packed products and were sold out to the investors by Investment banks at exorbitant
prices. The sudden decline in the value of these mortgage backed securities instigated credit
crisis.

In the year 2007, High Grade Structured Credit Strategies Enhanced Fund and High-Grade
Structured Credit Fund which were the two main hedge funds of Bear Stearns failed to perform
and blew up. This is when the investors began taking flight to safety after experiencing terrible
loss in these two major funds. Investors began to lose confidence in the company when the funds
lost almost 96% of their value which made them worthless in the market. The funds reached the
dire state because of Bear Stearns aggressive risky investments and collapse of CDO’s (Gata.org,
2015). However, in the market most frequent failures of hedge funds is due to the cataclysmic
market movement in the economy (Bruno, 2007). The two primary reasons the funds failed to
perform was one due to lack of ability of fund managers to predict commotion in the price
movements and other reason was of tremendously high use of leverage by the Bear Stearns. The
process and proceedings of the hedge funds are usually not disclosed hence it becomes difficult
to identify and investigate the core issue of failure for the funds. However, several reasons were
highlighted for the company’s failure. Bear Stearns managers failed to predict the shivery bond

35
market which caused severe liquidity problems for the company. Furthermore, arguments can be
made that the fund managers should have taken necessary steps for the future and the company
should have made liquidity available for any foreseen event. The inability of the managers to
hold company during its bad times and the company’s greed instant opportunistic returns led to
the turmoil (Thomas, 2013).

2.16 Summary
During this part of the study, the researcher has discussed about the global economic condition
during the global financial crisis. However, after the crisis, the economies of many countries
smashed and there were mainly two reasons were highlighted behind this financial crisis in 2007-
2008. This particular study also disclosed the role of governments and the Federal Reserve
during the global financial crisis, the conditions of US investment banks in that period and new
policies launched to control the crisis. The chapter also focused on JP Morgan’s strength which it
proved during the crisis and how it bailed out troubled Bear Stearns who was once its
competitor.

36
 Chapter 3: Research Methodology

3.1 Introduction
Research methodology is the guideline for a research study according to which the researcher
carries on the research work. In this chapter, the researcher has discussed about the particular
philosophy, approach and design those have been chosen for this research. Along with that, the
researcher also stated the justification for selecting the philosophy, approach and design. At the
same time, the researcher has also stated the methods of data collection, data analysis and
sampling. After that, the researcher focused on the ethical issues and the limitations of the
research study.

3.2 Method Outline

In this particular research, the researcher has selected the post-positivism philosophy, deductive
research approach and descriptive research design. Here, the researcher has used primary as well
as the secondary data. Primary data are collected from the employees of and managers of JP
Morgan as Bear Stearns has been collapsed. Other than the managers of JP Morgan, the primary
data has been collected from two financial analysts also. The researcher has followed the
qualitative and quantitative data analysis techniques to analyze the data.

37
3.3 Research Onion

Figure 6: Research Onion

Source: (Saunders et al. 2009)

Research onion describes the different stages or layers of a research methodology. It includes
mainly five different stages. The outer most stage or layer is the research philosophy, where the
researcher has selected the particular philosophy for the research. Bryman and Bell (2011)
opined that with the help of this stage or layer, the researcher can develop wider knowledge and
nature of the study. The next layer is the research approach, in which the researcher has chosen
the specific approach for the research. This layer helps to maximize the existing knowledge of
the researcher. After that, there is research strategy. At this layer, the researcher has chosen the
methods of primary data collection and analysis.

In the next layer, the researcher has described the time horizon for the research and at the inner
most stage, the researcher has described the techniques for collecting and analyzing the

38
secondary data for the research. Therefore, the research onion helps to make the research
methodology more effective and structured.

3.4 Research Philosophy

Research philosophy is standings based on mainly three pillars. The pillars of research
philosophy are – positivism, realism and interpretivism. All of these are known as different
philosophies of research. Positivism philosophy tries to disclose the truth of any matter. It is a
well-structured and simple philosophy. However, this philosophy has been modernized and is
named as post-positivism philosophy. Bernard (2011) stated that this philosophy is more
scientific and logical than the positivism philosophy because it identifies the ways of modern and
scientific thinking and uses scientific reasoning and common sense. On the other side, the
realism philosophy is based on the observable phenomena. It is not based on the thoughts and
beliefs of the individuals. Interpretivism philosophy is a socially contrasted philosophy that is
subjective in nature. However, for this research, the researcher has chosen the post-positivism
philosophy.

Post-
Positivism
Positivism

Research
Realism
Philosophies

Interpretivism

Figure 7: Research Philosophies

Source: (Brannen, 2009)

3.4.1 Justification for choosing the research philosophy

In this study, the researcher has chosen the post-positivism philosophy. This is because, post-
positivism philosophy is much scientific as well as logical than the other two philosophies. On
39
the other side, post-positivism philosophy is simple and easy to be followed and it analyses the
data and evidences based on the theoretical stances.

3.5 Research Approach

The procedures and the plans for a research study are described by the research approaches. For
a research study, mainly two research approaches are available and those are deductive research
approach and inductive research approach. Bryman (2006) commented that deductive research
approach includes the hypothesis testing. Due to this, it is also known as testing approach or
testing theory. On the other side, inductive approach uses the research questions to make the
scope of the research narrow. However, during this particular research study, the researcher has
followed the deductive research approach.

Research
Approaches

Deductive Inductive
research research
approach approach

Figure 8: Research approaches

Source: (Cameron, 2009)

3.5.1 Justification for choosing research approach

In this research, the researcher has selected the deductive research approach because it provides
the broader scope for research. With the help of hypothesis testing, the researcher can make the
study more prominent. On the other side, the deductive approach is casual in nature, which
makes the research study easier.

40
3.6 Research Design
In case of a particular research study, mainly three designs are available. The research designs
are – descriptive, exploratory and explanatory. Descriptive research design conducts the research
study by describing the matters of the study. According to Ellis and Levy (2009), it takes the
help of three methods like observational, survey and case study to describe the things to the
researcher or people. Exploratory research design tries to identify the relationship between the
variables of a research study. It is bit complex than that of descriptive research design. On the
other side, explanatory research design uses history to conduct a research. However, in this
particular research, the researcher has used the descriptive research design.

Descriptive

Research
Exploratory
Designs

Explanatory

Figure 9: Research designs

Source: (Brannen, 2009)

3.6.1 Justification for choosing research design

During this particular research, the researcher has chosen the descriptive research design because
this design helps to conduct the research by using the existing theories or literature. With the
help of this research design, the researcher can have greater knowledge of understanding through
detailed investigation regarding the research topic. Therefore, the research study becomes
simpler by following this research design.

41
3.7 Data collection method
In this research study, the researcher has used mainly two types of data which is primary data
and secondary data. Bryman (2006) opined that primary data are mainly collected through
survey, focus group or interview. On the other side, secondary data are the existing data those are
available in the existing literature or websites. During this research, the researcher has taken the
help of two different methods to collect the primary data. The methods are – survey and
interview. Survey has been done with 50 employees of JP Morgan in India working from
Mumbai Branch and also telephonic interview for 3 JP Morgan managers and 2 Financial
Analysts has been conducted for the research study.

These two methods are very effective because these methods help to collect the data directly
from the participants and helps to collect the view and responses of different persons. Bergh and
Ketchen (2009) opined that primary data is very essential part of a research study because it
provides the knowledge about the current situation. However, the researcher must take care of
the ethical issues so that the reliability of the data is not hampered. On the other side, the
researcher has collected the secondary data from different books, journals, articles and different
websites.

3.8 Sampling technique

During this particular research study, the researcher has used a particular sampling technique to
select the sample for survey and interview. The sampling technique that the researcher has used
is simple random sampling technique. The researcher has chosen this particular sampling
technique because this is an easier and simpler technique to identify the sample. On the other
side, this sampling technique requires less time and cost (Welman et al., 2005).

Under this simple random sampling technique, the researcher has used probability-sampling
technique to select the employees of JP Morgan for survey. This is because the numbers of
employees are huge in the organization and it was impossible for the researcher to survey all the
employees with the limited timeframe. On the other side, the researcher has used the non-
probability sampling technique to select the managers of JP Morgan and the financial analysts
for interview. This is because the numbers of managers of the particular organization are limited.

42
3.9 Sample size
In this research, the researcher has not chosen a vast sample size. The researcher has set the
sample size small due to the time and cost limitations. However, the researcher has chosen 50
employees of JP Morgan in India and distributed the survey questionnaires through different
social media sites like Gmail, Yahoo mail and Facebook. Additionally, the researcher has
selected 3 Managers of JP Morganof whom twoare currently working in India-Mumbai branch
and the third manager has moved out of JP Morgan having gained experience of 2.5 years and is
now the Asia head of Deutsche bank. Therefore, total sample size of the study is 50 employees, 3
managers and 2 Financial Analysts.

3.10 Data analysis technique

Data analysis is another vital part of the research study because it actually identifies the result of
the study. Therefore, it is obvious that to conduct the data analysis accurately, it is very
important to select the appropriate techniques to analyze the data. In this research study, the
researcher has chosen two different techniques to analyze the research data. The techniques are –
quantitative technique and qualitative technique.

The researcher has used the quantitative data analysis technique to analyze the primary data
those have been collected through survey. With the help of this particular technique of data
analysis, the researcher was able to analyze the data by using mathematical technique. The
researcher has taken the help of Microsoft Excel for the quantitative analysis of the survey data.
The researcher has also used the qualitative data analysis technique in this research. This
technique has been used for the analysis of the primary data collected through interview method.
With the help of this particular data analysis technique, the researcher conducted a depth analysis
of the data collected from the managers of JP Morgan. At the same time, the qualitative data
analysis technique has helped the researcher to understand the behavior and mentality of the
managers of the two organizations. However, the researcher has taken the help of Microsoft
Word to present the qualitative data analysis.

43
3.11 Ethical issues
In this particular research study, the researcher has taken several steps to face ethical issues and
those are stated below:

Maintaining reliability and validity: The researcher has collected the secondary as well as the
primary data from the reliable sources and maintained all the rules and regulations provided by
the University. On the other side, the researcher has used proper techniques and methods to
collect and analyze the research data so that validity of the research can be maintained.

Maintaining the privacy of the survey and interview participants: The researcher has also
taken care of the privacy of the research survey and interview participants. The researcher has
kept the personal information of the participants confidential to maintain the privacy.

Permission from the survey and interview participants: The researcher has also taken the
proper permissions from the survey and interview participants before involving them into the
research. The researcher has taken special permission from the managers of the company before
taking the interview and also disclosed the aim and objectives of the research to all the
participants.

44
3.12 Time horizon

Activities 1st 2nd 3rd 4th 5th 6th 7th 8th

week week week week week week week week
Review of existing
literature
Identifying the gap
between the existing and
current researches
Topic selection
Setting the aim, objectives
and questions
Literature review for the
current topic
Selection of research
methodology
Primary and Secondary
data collection
Data analysis
Finding out the results
after analysing the data
Concluding the study
Providing few
recommendations
Submission of the
research paper
Table 1: Gantt Chart

Source: (Created by author)

45
3.13 Summary
During this particular chapter of the study, the researcher has identified particular philosophy,
design and approach for the research. It has been found out that the researcher has used the
primary as well as the secondary data for the research. Along with that, the researcher has used
survey and interview method to collect the primary data for the research to be in depth and have
a critical view on the study. At the same time, the researcher has used quantitative and qualitative
data analysis techniques to improvise the research.

46
 Chapter 4: Data analysis and findings

4.1 Introduction
In this particular chapter, the researcher has analyzed the primary data those are collected
through survey and interview. The data are analyzed with the help of qualitative and quantitative
data analysis techniques.

4.2 Quantitative data analysis

Questionnaire to 50 employees of JP Morgan:

4.2.1 What is the gender that you belong from?

Options Numbers of Percentage (%) Total respondents

respondent
Male 31 62% 50
Female 19 38% 50
Table 2: Gender of employees

Gender of the employees

62%
80% Percentage (%)
60% 38%
40%
20%
0%
Male Female

Figure 10: Gender of Employees

Findings:

47
From the above table and diagram, the questionnaires distributed in JP Morgan India- Mumbai
Branch was filled by 62% Male employees and remaining 38% Female employees.

Analysis:

After analyzing the above data, it can be analyzed that male employees are more than the female
employees at the organization that is JP Morgan. Therefore, by understanding the demographic
issue of the organization, the researcher analyses that the organization is depended more on male
perception of conducting the business.

4.2.2 What is the age group that you belong from?

Options Numbers of Percentage (%) Total respondents

respondent
25 to 30 years 21 42% 50
30 to 40 years 11 22% 50
More than 40 years 18 36% 50
Table 3:Age group of the employees

Age group of the employees

50% 42%
36%
40%
Percentage (%)
30% 22%

20%
10%
0%
25 to 30 years 30 to 40 years More than 40 years

Figure 11: Age group of the employees

48
Findings:

As per the above table and diagram, maximum number of employees 42% of JP Morgan is
between the age group of 25 to 30 years. Percentage of the employees belong from the age group
that is more than 40 years is 36%. On the other side, the percentage of the employee belongs
from 30 to 40 years age group is less than other two age groups that is 22%.

Analysis:

The above findings are indicating that the number of younger employees is more at JP Morgan.
It is a good sign for the company because young employees generally have more energy and the
ability to adopt something new in the organization, is more in case of the young employees.
However, the number of older employees is not comparatively less which is again a good sign
because old employees generally have more experience than younger employees. On the other
side, the less number of middle-aged employees denotes that the retention rate of young
employees is less in JP Morgan which denotesas a threat for the organization.

4.2.3 How far do you believe that the financial condition of Bear Stearns was stable before
the crisis in 2007-2008?

Options Numbers of Percentage (%) Total respondents

respondent
Strongly believe 4 8% 50
Believe 11 22% 50
Neutral 6 12% 50
Disbelief 18 36% 50
Strongly disbelief 11 22% 50
Table 4: Employees’ perceptions regarding the financial condition of Bear Stearns during the
crisis period in 2007-2008

49
 Employees’ perceptions regarding the fin-
ancial condition of Bear Stearns during the
crisis period in 2007-2008
36%
40% Percentage (%)
30% 22% 22%
20% 12%
8%
10%
0%
Strongly be- Believe Neutral Disbelief Strongly
lieve disbelief

Figure 12: Employees’ perceptions regarding the financial condition of Bear Stearns during the
crisis period in 2007-2008

Findings:

In the above table and diagram, it can be seen that maximum number of employees that is 36%
and 22% of JP Morgan disbelieves and strongly disbelieves that financial condition of Bear
Stearns was stable before the crisis period of 2007-2008. However, 22% and 8% of the
employees are there those believe and strongly believe that financial condition of Bear Stearns
was stable. Rest 12% has neutral views regarding this question.

Analysis:

After analyzing the above data, it can be identified that maximum of the employees of JP
Morgan disbelief that the financial condition of the organization during the crisis in 2007-2008
was stable. At the time of comparing Bear Stearns with JP Morgan in the literature review of the
study, the main reason behind the downfall of Bear Stearns has been identified. The reasons
behind the downfall of Bear Stearns were stagnant financial leverage and the dependency on the
creditors and regulators. This indicates that the financial performance of the bank was not
satisfactory before the crisis period due to which the downfall came. However, few employees
share a contradictory view as they believe that the financial condition of Bear Stearns was stable
in 2007-2008.

50
4.2.4 How far do you believe that the strategies taken by Bear Stearns during the crisis of
2007-2008 were suitable?

Options Numbers of Percentage (%) Total respondents

respondent
Strongly believe 1 2% 50
Believe 6 12% 50
Neutral 7 14% 50
Disbelief 19 38% 50
Strongly disbelief 17 34% 50
Table 5: Employees’ perceptions regarding the effectiveness of the strategies of Bear Stearns
during the crisis period in 2007-2008

Employees’ perceptions regarding the effectiveness

of the strategies of Bear Stearns during the crisis
period in 2007-2008
38%
40% 34%
Percentage (%)
30%
20% 12% 14%

10% 2%
0%
Strongly be- Believe Neutral Disbelief Strongly
lieve disbelief

Figure 13: Employees’ perceptions regarding the effectiveness of the strategies of Bear Stearns
during the crisis period in 2007-2008

Findings:

51
As per the above table and diagram, maximum employees that are 38% disbelieved that the
strategies taken by Bear Stearns during 2007-2008 were suitable. However, 2% and 12%
employees of JP Morgan are there those strongly believe and believe that the strategies of Bear
Stearns were suitable for the organization. On the other side, 14% employees are there those
remain neutral regarding this question.

Analysis:

This indicates that the strategies of the organization at the time of financial crisis were
inappropriate that might be the reason behind the sale out of Bear Stearns. At the time of
explaining how much Bear Stearns was exposed to the short-term money market and mortgage
backed securities during the crisis period, in the literature review it has been disclosed that
strategies of Bear Stearns were much ineffective. Due to that, the bank faced lack of liquidity,
shortage of gold and silver and high stock of subprime mortgage. It has also been observed
during the literature review that Bear Stearns was totally unable to manage its condition during
the crisis period. Due to its liquidity issues and lack of management in the bank, the customers
lost faith which instigated the bank to fall. This again indicates that the bank was unable to take
suitable strategies at the time of crisis in 2007-2008.

4.2.5 How far do you believe that credit crunch and subprime mortgage lending were the
main reasons behind the financial crisis in 2007-2008?

Options Numbers of Percentage (%) Total respondents

respondent
Strongly believe 19 38% 50
Believe 14 28% 50
Neutral 3 6% 50
Disbelief 7 14% 50
Strongly disbelief 7 14% 50
Table 6: Employees’ perceptions regarding the reasons behind financial crisis in 2007-2008

52
 Employees’ perceptions regarding the reasons
behind financial crisis in 2007-2008
38%
40%
35% 28%
30%
25%
20% 14% 14%
15%
6%
10%
5%
0%
Strongly believe Believe Neutral Disbelief Strongly disbelief

Figure 14: Employees’ perceptions regarding the reasons behind financial crisis in 2007-2008

Findings:

After analyzing the data disclosed in the table and diagram, it can be said that maximum 38%
and 28% numbers of employees of JP Morgan Strongly believe that credit crunch and subprime
mortgage lending were the reasons behind the financial crisis. However, few employees are there
that is 14% and 14% those disbelieve and strongly disbelieve for the same. The remaining bunch
of 6% shared neutral view.

Analysis:

The above findings are clearly indicating that, credit crunch and subprime mortgage lending are
the main reasons behind the financial crisis in 2007-2008. In the literature review section, the
researcher identified the two major reasons which also matched with the 66% of the employees
in JP Morgan when distributed the questionnaires. The cause of the financial crisis of 2007-2008
was its initial stage which led to fall in home prices hence resulting in delinquencies in
mortgages. The author has highlighted the reason behind the credit crunch which took place in
2007-2008 was mainly due to the innovation of new financial instruments and the techniques of
packaging and reselling of assets. Furthermore, researcher also identified reasons behind sub-
prime mortgage lending which was due to decline in the home price in the United States.
According to Atkinson, Luttrell and Rosenblum (2013), United States had to bear loss 40% to
90% of their sum output which equivalents to $50000 to $120000 for every U.S household.

53
4.2.6 How far do you believe that undertaking of Bear Stearns was profitable for JP
Morgan?

Options Numbers of Percentage (%) Total respondents

respondent
Strongly believe 14 28% 50
Believe 17 34% 50
Neutral 4 8% 50
Disbelief 6 12% 50
Strongly disbelief 9 18% 50
Table 7:Employees’ perceptions on the profitability for JP Morgan on undertaking Bear Stearns

Employees’ perceptions on the profitability

for JP Morgan on undertaking Bear Stearns
34%
35% 28%
30%
25% 18% Percentage (%)
20% 12%
15% 8%
10%
5%
0%
Strongly be- Believe Neutral Disbelief Strongly
lieve disbelief

Figure 15: Employees’ perceptions on the profitability for JP Morgan on undertaking Bear
Stearns

Findings:

54
After analyzing the above data, it can be said that maximum number of the employees that is
34% and 28% of JP Morgan believes that the company has made profit by purchasing Bear
Stearns. However, 12% and 18% employees are there those disbelieve and strongly disbelieve
the same.

Analysis:

The above findings are indicating that of JP Morgan has made much profit by undertaking Bear
Stearns. In the portion of literature review of reasons for the sustenance of JP Morgan, it has
been identified that JP Morgan has made several mergers and acquisitions for its profit.
Therefore, it is obvious that the company has not taken part in any non-profitable corporate
action of any kind of merger or acquisition. Therefore, it can be said that purchase of Bear
Stearns was profitable for JP Morgan. In the literature review section, it was noted that during
the crisis situation the budgets of JP Morgan were intact and were maintained by its efficient
management team with the bank for which JP played as a strong player and managed to bailout
its top competitor Bear Stearns during the crisis.

4.2.7 How far do you believe that Bear Stearns was undervalued by your company at the
time of purchase?

Options Numbers of Percentage (%) Total respondents

respondent
Strongly believe 14 28% 50
Believe 21 42% 50
Neutral 1 2% 50
Disbelief 8 16% 50
Strongly disbelief 6 12% 50
Table 8: Employees’ perceptions regarding the valuation of Bear Stearns’s share at the time of
purchase by JP Morgan

55
 Employees’ perceptions regarding the valuation of
Bear Stearns’s share at the time of purchase by JP
Morgan
50% 42%
40% Percentage (%)
28%
30%
16%
20% 12%
10% 2%
0%
Strongly be- Believe Neutral Disbelief Strongly
lieve disbelief

Figure 16: Employees’ perceptions regarding the valuation of Bear Stearns’s share at the time
of purchase by JP Morgan

Findings:

As per the above table and diagram, it can be identified that majority of JP Morgan employees
believe that the share prices of Bear Stearns were undervalued and were sold to JPM. However
there is difference in opinion on the views as some employees tend to disbelief the
undervaluation of Stearns. However, 2% of the employees share neutral views on this.

Analysis:

As per the findings, it can be said that employees of JP Morgan the company has undervalued
Bear Stearns at the time of purchase. The comparing Bear Stearns with JP Morgan section in the
literature review, it has indicated that JP Morgan has undervalued Bear Stearns at the time of
purchase. Bear Stearns was sold to JP Morgan at a fore scale price of just $2 which was
eventually raised to $10 in a span of two weeks. This sale of Stearns was moved into the hands
of Jamie Dimon by backstopping on a portfolio of nearly $30 billion in mortgage backed
securities. This means, JP Morgan proved to be a smart player by managing Bear Stearns
purchase at a minimal rate thereby making huge profit from the deal (Schaefer, 2013).

56
4.2.8 How far do you believe that the market position of JP Morgan was affected by the
purchase of Bear Stearns?

Options Numbers of Percentage (%) Total respondents

respondent
Highly affected 30 60% 50
Less affected 12 24% 50
Not affected 8 16% 50
Table 9: Changes happened in JP Morgan

Changes happened in JP Morgan

Percentage (%)
60%

24%
16%

Highly affected Less affected Not affected

Figure 17: Changes happened in JP Morgan

Findings:

In the above table and diagram, it can be seen that 60% of the employees of JP Morgan believe
that the market position of the company was highly effected after the purchase of Bear Stearns.
24% believe that the effects were less and 16% believed that the market position of the company
was not at all affected.

57
Analysis:

After analyzing the above data, it can be said that the market position of JP Morgan was
definitely affected by the purchase of Bear Stearns. In the literature review part of competitor
analysis of JP Morgan and other banks during the crisis, it has been disclosed that the share
price of JP Morgan in 2007-2008 was above the S&P index. This indicates that after purchasing
Bear Stearns the share price of JP Morgan increased that is the sign of positive market growth.
This means the market position of the company was affected but in positive sense (Refers to
appendix 1).

58
4.3 Qualitative data analysis:
4.3.1 Interview to the 3 managers of JP Morgan:

4.3.1.1 What was the financial condition of JP Morgan during the financial crisis in 2007-
2008?

At the time of answering this question, 1st manager of JP Morgan commented that ‘Our
Company is always financially stable’ (Ravishree Chatla, 2015; Process Manager). Along with
that, the manager also stated that the financial crisis of 2007-2008 has affected JP Morgan but it
could not hamper the financial or market position of the company. In the competitor analysis of
JP Morgan and other banks during the crisis part of the literature review, it has also disclosed
that in 2007-2008, the share price of JP Morgan was much higher than that of other competitors.
Therefore, it is clear that the financial condition of JP Morgan was much stable during the
financial crisis of 2007-2008

4.3.1.2 What were the strategies that your company has applied to bailout Bear Stearns
during the financial crisis of 2007-2008?

While answering this question, 2nd manager of JP Morgan stated that ‘gaining more market share
was the main strategy to bailout Bear Stearns during the financial crisis of 2007-2008’
(Kamakshi Rathore, 2015; Former Senior Analyst-JPM). The manager again stated that the
motto of JP is always to gain more funds and make a better market position. The manager also
added that undertaking of Bear Stearns was profitable for JP at that time because during financial
crisis it was possible to undertake the largest investment bank at a lowest price)

While comparing Bear Stearns with JP Morgan in the literature review, it has identified that in
2007-2008, the strategies of JP Morgan were to gain equity shares and fund. It also has
undervalued Bear Stearns for that. Therefore, it is very clear that the main strategy that JP
Morgan applied to bailout Bear Stearns was to increase their own fund and market share.

4.3.1.3 What were the reasons behind providing the help to Bear Stearns to manage its
bailout?

59
At the time of answering this question, the 3rd manager of JP Morgan commented that ‘in 2007-
2008 Bear Stearns was one of the largest investment bank and we got the chance to purchase
that at the lower price’(Sandeep Chaube, 2015 Manager- Corportae action team). At the same
time, the manager also disclosed that in 2007-2008, JP was involved in the operation with CDOs
at a high rate. Due to which the transparency in the trading of mortgage-backed securities was
decreased and the US government stated investigation. Hence, the management of JP understood
that this situation could be managed with the help of the bailout of Bear Stearns.

The same thing is also stated while explaining CDOs, CDS and mortgage-backed securities in
relation to the banks in literature review that that excessive trading in CDOs put JP Morgan in
trouble. JP could manage this situation by showing its trading under the head of Bear Stearns.
Therefore, it can be said that to manage the risky situation in 2007-2008 and to manage the
transparency, JP Morgan helped Bear Stearns to bailout.

4.3.2 Interview to the 2 financial analysts:

4.3.2.1 What were the main Challenges that JP Morgan has faced after the purchase of
Bear Stearns?

While answering this above question, 1st financial analyst stated that ‘it was very challenging for
JP Morgan to sell the mortgage securities of Bear Stearns’. Along with that, the analyst also
mentioned that the internal financial position of the bank was worst at that time and managing
that situation was not so easy. On the other side, the investigation by the US government also
threw another big challenge to JP Morgan (Ranjan Sethi, 2015; Stock Market Analyst).

The literature review while explaining the role played by the government and Federal Reserves
during the financial crisis in 2007-2008, has stated that during the financial crisis of 2007-2008,
the Federal Reserve made its policies stronger and the US government allowed the foreign
companies to help the bailout of some key financial institutions. This means the competition in
the market increased, which was again a major challenge for JP Morgan.

4.3.2.2 How much the decision of purchasing Bear Stearns was suitable for JP Morgan at
the time of global financial crisis?

60
At the time of answering this particular question, the 2nd financial analyst commented that
‘purchasing Bear Stearns was much profitable for JP Morgan’. In support of his comment, the
analyst again added that in 2007-2008, Bear Stearns was agreed to sale its business at any price.
JP Morgan took this chance and purchased the share of Bear Stearns at $2 per share instead of
$10 per share. This means, the company made huge profit by purchasing Bear Stearns (Juhi
Jagtani, 2015; NDF Analyst).

The comparing Bear Stearns with JP Morgan section in the literature review, it has been
identified that JP Morgan has undervalued Bear Stearns at the time of purchasing. Therefore, it
can be said that decision of purchasing Bear Stearns was much suitable for JP Morgan in 2007-
2008.

4.4 Summary
During this part of the study, the researcher has identified that the decision of JP Morgan to
undertake Bear Stearns was effective and profitable. The company has faced some challenges at
the time and after the purchase of Bear Stearns. At the same time, it has also identified that the
financial position of JP Morgan was more or less stable. It also has faced problem during the
investigation by the US government for the sale of subprime mortgage by the financial
institutions. However, to conclude the study, it is very important for this research to identify
whether the findings of the quantitative and qualitative analysis and literature review have met
the objectives or not. For this reason, the research has tried to link the objectives with the
findings of the study in the next chapter.

61
 Chapter 5: Conclusion, Objective linking and Recommendations

5.1 Conclusion:
From the data analysis and interpretation, the researcher has concluded that the condition of the
economic structure of the world in the time of the crisis period which occurred in 2007-2008
tries to state the position of the economy on a global basis, it states the economies and
diseconomies of scale, and it tries to investigate the reason for the occurrence as well as the
impacts of this situation.

The main highlights on which the research dealt with is the basic reasons for which the crisis
occurred like ‘credit crunch’, ‘subprime mortgage lending’ etc. It has been found that the US
bank played a great role in this situation were the Government and the Federal Reserve’s policy
implemented strategies to provide solutions for the credit crunch and diseconomies to meet up
the crisis period. The short-term money market and mortgage-backed securities are linked with
the failure of ‘Bear Stearns’, the Bear Stearns was highly related to the short term money market
as it focused on it. The ‘competitors analysis’ made by JP Morgan made able to know itself how
to run. Collateralized debt obligation, credit default swaps, and mortgage backed securities and
its function relating to the banks are discussed in this research work.

It was analysed that the credit crunch the financial crisis of 2007-2008 occurred due to the freeze
in the market of stock liquidity, as before the crisis period, the bank of global economy was
directly supported by the funds of the money market in the economy. These types of funds in the
money market was created by the issue of commercial papers by the large business
organisations.

The researcher has also observed that the big business organizations fell in a great trouble when
it withdrew $152 billion and they reached to a position when they were unable to meet up there
short-term debt. Reselling of assets, techniques of packaging and innovation of new financial
instruments were the main reason for the occurrence of the complex credit crunch.

In the year of 2007, the subprime mortgage crisis was seen in the worldwide banking parts,
which caused a recession in the United States. The main causes for the subprime mortgage crisis

62
was decreased rate of price of homes, lending to the mortgage foreclosures and the delinquencies
and side by side due to the decrease in the value of derivatives markets like stocks and
debentures. The high recession decreased the value of the investments in the residential projects
of the US economy. As a result, the investment banks who invested in these housing project,
faced great debt during this times. When household debt and low credit quality increased, the
housing sectors came face to face with massive defaults. Before the financial crisis of the world
economy countries like India, china, and other Asian countries were going through a dynamic
growth on the global economy up to 2006. Japan was going in an increasing way by 2 %
approximately yearly, and the other European countries were running their business by a growth
rate of 2.12 %.

A powerful Agenda was placed by the European Union for the negotiation of all the items in
“Doha Agenda”. In the first part of the year, the economic condition was fair but it failed to
perform miserably in the middle of 2006. The agricultural as well as the non-agricultural market
also failed in such a way that the World Trade Organisation (WTO) failed to meet up the
requirements for the restructuring of this part.

The excessive borrowings and long-term debts affected the financial institutions and nationalized
banks to increase its debts and liabilities. The financial growth was affected by the lack of clarity
and risky investments by the financial institutions, this un-clarity and risk driven investments by
the financial institutions led the breakdown in ethics and accountability of the firms. The
researchers also opined that Asian and European global crisis occurred due to the increase of the
asset prices and it was found that the rate of outflow of cash and capital were more in terms of
inflow of cash and capital.

The researchers had given ideas to use credit default swaps, synthetic CDO’s, and the debt
allegations to develop the conditions of the investment banks from the present condition. Some
products like mortgage back securities, debt allegations, were taken to be subjective for the
investment banks to regain their position in credit rating. Being the largest banking institute in
USA, “JP Morgan” faced a several numbers of risks in the market during the crisis period;
however, JP Morgan proved itself in the competitive market during the crisis period to bailout
the troubled Bear Stearns who was once its top competitor.

63
5.2 Objective Linking
Objective 1: To identify the situation of the global economy before the global financial
crisis situation aroused

This particular objective has been met by the literature review as well as the primary data
analysis of the study. In the section of literature review, where the researcher has discussed about
the Condition of the world economy before the financial crisis period of 2007-2008, it has been
identified that dynamic growth was happening in the global economy before the crisis aroused.

At the same time, in chapter 4, question number 4.2.3 has stated that the financial condition
particularly in case of Bear Stearns was not that much stable before the crisis. This was because
the management of the bank took some wrong strategies. On the other side, in the qualitative
question 4.3.1.1, the manager of JP Morgan has stated that financial position of JP Morgan was
always stable. Therefore, it can be said that the researcher has met this objective and identified
that before crisis, the global economy was stable. However, few institutions like Bear Stearns
were struggling due to their wrong business strategies. Therefore, the objective of identifying the
situation of global economy before the global financial crisis has been met successfully.

Objective 2: To identify the actual reasons behind the global financial crisis in 2007-2008

The researcher again met this objective with the help of the literature review and the primary
data analysis. At the time of discussing about the reasons behind the financial crisis of 2007-
2008 in the literature review, the researcher has identified that mainly two reasons were there
behind the crisis in 2007-2008. The reasons were credit crunch and subprime mortgage lending.

At the same time, in the quantitative question 4.2.5, it has been identified that maximum
employees of JP Morgan believe that credit crunch and subprime mortgage lending were the
main reasons behind the global financial crisis. Therefore, from these the reasons of global
financial crisis in 2007-2008 have been cleared and the objective has been met.

Objective 3: To identify the role played by Government and Federal Reserves during the
financial crisis.

64
During the study, in the literature review, the researcher has explained the roles played by the
government and federal reserves in implementing the new set of policies during the financial
crisis which aimed to adapt extreme rise in the employment rate and ensure the price stability in
the country. In the year 2007, federal reserves and government response was violent to the
financial crisis as they had introduced various schemes which was structured in way to maintain
the liquidity position of financial institutions and help them in improving their state in the
financial market (Federalreserve.gov, 2015). Later after the financial crisis over the recent years
both government and federal reserves are working hard on substantial purchases of long term
securities which is aimed to put down pressure on long term interest rate and also in overall
easing the financial conditions prevailing the market.

Figure 18: The major categories of intervention by the Federal Reserve board

(Source: Thakor, 2015)

Objective 4: To identify and analyze the accurateness of the strategies those were taken by
the management of Bear Stearns to safeguard the bank during the global financial crisis in
2007-2008

While comparing Bear Stearns with JP Morgan in the literature review, it has been identified by
the researcher that strategies of Bear Stearns to safeguard the bank during the crisis were not
accurate rather failure. The same thing was also disclosed at the time of explaining how much

65
Bear Stearns was exposed to the short-term money market and mortgage backed securities
during the crisis period in the literature review.

Along with that, in the quantitative question 4.2.4, in chapter 4, it has been identified maximum
employees of JP Morgan stated that the strategies of Bear Stearns in 2007-2008 were not suitable
for the organization. Therefore, it can be understood that no accurateness was there in the
strategies of Bear Stearns to safeguard the bank in the global crisis of 2007-2008. Hence, it can
be said that the researcher has successfully met the objective of the research.

Objective 5: To understand the techniques or strategies that JP Morgan applied to manage

the bailout of Bear Stearns

As the time of comparing Bear Stearns with JP Morgan in the literature review, the researcher
has identified the strategy that JP Morgan applied to manage the bailout of Bear Stearns. The
section of the literature review stated that JP Morgan managed its risk management policies and
rapid cash inflows to manage the bailout of Bear Stearns. At the same time, the company also
hired new and experienced people to manage the bailout of Bear Stearns.

Along with that, the quantitative questions 4.2.7 and 4.2.8 have explained that JP Morgan
undervalued Bear Stearns and increased its market position to manage the bailout of Bear
Stearns. Apart from that, the quantitative questions 4.3.1.2 and 4.3.1.3 have stated about the
reasons and strategies behind managing the bailout of Bear Stearns. These questions have stated
that to gain more funds or profit, JP Morgan took the strategy of Gain more market share. These
strategies were much suitable and that is proved in qualitative question 4.3.2.2. However, the
qualitative question 4.3.2.1 stated that JP Morgan faced several challenges after purchasing Bear
Stearns. Therefore, from the findings of these questions and literature review the strategies of JP
Morgan and their suitability have been cleared out and the objective to understand the strategies
of JP Morgan has been met.

5.3 Recommendations:
Even today the U.S is suffering from the enormity of financial crisis and several research articles
have been written about its impacts till date. The researcher would like to draw some

66
recommendations bearing in mind the financial losses that affected the US economy and also the
global markets.

a) Recommendation on investors protection by ring fencing:

During the financial crisis of it was noted that there was lack in shielding the investors’
money because of improper ring fencing resulting in the investor’s capital not well
safeguarded. Investors when investing for gaining returns out of the investment they
made expects their capital to be safeguarded and prot5ected through ring fencing which
ensures greater safety. In 2001-2002, a great outline success story occurred when Enron
took over Oregon based Portland General Eclectic, this was when Enron was declared
bankrupt due to its non-transparent working and other accounting frauds, however in the
case of Portland General Electric and its customers were well protected from evasions
using ring fencing for its products. However, in the case of JP Morgan also the senior
executives staff was given notices and periodic alerts about the controversial part
responsible for a shock of $2 billion trading loss at the bank which was suffered due to
poor risk management within the bank (Scott-Quinn, 2012). Hence, it is recommended in
the U.S to use such kind of methods in financial conglomerates with diverse service
portfolios.

b) Recommendations for elimination of new tools in finance:

The researchers has found that the funds raised in the money market came into existence
by the issue of commercial papers by the large business organisations, this was one of the
main source of finance for the banks in aspect of global economy. In the year 2008 when
a large amount of money was borrowed by the financial institute the large business firms
fell down to a big trouble, and ultimately they were unable to roll over the short term
debts, thus in this way the innovation of new financial instruments and the techniques of
packaging and reselling of assets affected the global economy. Thus the researchers has
recommended that if the global banks were not supportive from the issue of the
commercial papers issued by the large business organisations then it would not have
happened to face a huge economic crisis.

c) Recommendation in moderate usage of subprime mortgage lending:

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 In United States, loans were provided for the borrowers having poor history in their credit
and these lenders were used to struggle to repay their loan amount. After this, the risky
investments were passed to the experts of big banks who anyhow managed these funds by
less risky in form by setting them into small groups. The amount of each loan was
uncorrelated, according to some researchers of this subject the process was recommended
to be negative result providing. High investment in residential projects led to a massive
fall in the return on investment by following this strategy in the mid-2007. The rate of
return was found to be 30 % decreasing in rate, which was a huge downfall for the
investors in this ground. Thus, it is recommended to have a control on this ‘mortgage
lending’, which was initiated by the financial institutes at that time.

d) Recommendation for enquiry commission:

According to the studies by the researchers, it was stated that though an enquiry
commission for the financial crisis 2007-2008 was organised but it would have even
resulted good; if it was set up a time before. The central banks and the governments
responded with monetary policies, institutional bailouts and fiscal stimulus. An act of
reinvestment by the congress was also introduced in 2009, which provided a little help in
this crisis period. After this event, the various national banks and financial institutions
tried to start an inquiry commission, which will provide the details of the reason, cause
and recommendable points that are needed for overcome the situation. The researchers
recommended that the excessive borrowing had affected the financial institutions and
nationalized banks to increase their liabilities and debts, if this borrowings were done less
in amount or in a moderate way then the economic crisis would not prove to be so much
hampering. Side by side, it was analysed that the downfall of economy continued up to
mid-2009 and this led to degradation in the interest rates of the banks. In this way, the
positive working capital made ensure that the organisations should be able to contribute
funds so that the short-term debt and the operating expenses can be meeting up.

e) Recommendation in strengthening the currency:

It was found a high rate of unemployment of the people in the financial crisis period; this
was a result of increase of asset price and an increase in capital outflow than inflow. It is

68
 very natural that if a nation’s capital inflow is lesser than the outflow then the nation will
obviously meet a credit crunch and the economy will surely be disabling to meet up all
the economic factors. The researchers have recommended that the employment
opportunity of the people diminished because of perfect cash flow system in the
economy. The researchers has also stated that if the financial institutes and nationalized
banks had figured to reduce the effects of the financial crisis then the crisis would have
resulted in a lesser amount. The researchers recommended in this research that if the
currency value was increased then low interest rates would have boosted the foreign
capital investments and indirectly increasing the profits in the stock market. To be more
specific, it states that the increased value of currency directly increases the stock market,
options market and futures market of the nation. As a direct result, it occurs a low interest
rate, which indirectly encourages investing the foreign capital to invest in the stock
market.

f) Facilitate systematic failure of troubled banks:

The researcher recommends on the company which are not able to perform itself in the
market due to any circumstances should not be bailed out by using tax payer’s money
rather than it should be allowed to be failed in an orderly manner without causing any
trouble in its image in the market. During financial crisis 2007-2008, the institutions
which took excessive risk were then bailed out by the tax payers. In order to stand-in the
competitiveness and shrink the moral hazard, the government working institutes should
be given access to the preferential lending as it was in the case of Fannie Mae and
Freddie Mac having a tightened regulation and supervision. The researcher recommends
of controlling systematic risk in that way dropping the moral hazard and eliminating the
tax payer’s money to bail out the financial institutes for their mistakes.

69
 Chapter 6: Self-reflection

I have learnt various types of new ideas and have gained knowledge while conducting this
research work. The research has helped me enhance my skills and expertise my chosen topic in a
broader view. From the study “the tip of the ice berg : JP Morgan chase and bear Stearns I have
got to know from the research that how the descriptive research has helped to analyze the crisis
period situations and how the economy behaved that time. I have learned to know that during the
quantitative analysis that the strategies taken by bear Stearns failed in competing in the market
and was ineffective. It was also noted that the financial stability within Bear Stearns was
instable. As per the qualitative analysis I have understood that gaining more market share and
more funds were the main strategies behind managing the bailout of Bear Stearns by J P Morgan.
There were several challenges faced by JP Morgan during the crisis, as an investigation was help
for its lack of transparency by the US government during the crisis.

The research broadened by concept about CDO’s, CDS, Mortgage backed securities which I was
willing to learn in depth. I was also able to study more on the factors like “credit crunch”, “sub-
prime mortgage lending”. The research also helped me in understanding the situations of the
investment banks in US and the role played by government and Federal Reserve’s in
implementing new policies to solve the financial crisis.

The philosophy I have followed up by the research is based on post positivism theory as well as
on positivism theory. In the positivism theory, it was found that the research is based on
sampling technique, sample size, method of data collection and method of data analysis. The
theories of the philosophy like sampling technique are an efficient method of data interpretation

70
and data analysis, which helps in the management study for a proper sample size recognition.
However, to know and analyze the research, it is very much important to observe the sample size
of a finding, determining the sample size of a project is to have a direct link with the observation
criteria and the main link of the observation. In management study, it is very much precious to
have a direct linking with the sample size and the researcher.

The most experience gaining section for me was when I had to telephonically interview the
managers and analysts of JP Morgan- Mumbai. During this section I came across few extra
knowledge which I have interpreted in my Chapter 4. From the overall findings and connecting
links through the literature review it was found eventually that the bailout decision of troubled
Bear Stearns was a good and profitable decision by JP Morgan who again proved itself to be one
of the top banks even during the crisis. I also believe that this Masters study would help me for
my future betterments in the finance field especially in an investment bank sector as it has
enhanced my leadership qualities and also has boosted me up for achieving goals.

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 Appendices:

Appendix 1:
Performance of JP Morgan compare to S&P Financial and S&P 500

(Source: Forbes.com, 2014)

Appendix 2:
Bank Failures from July 2007 through December 2009

79
(Source: Fahlenbrach, Prilmeier and Stulz, 2012)

Appendix 3:
Below are the quantitative questionnaires distributed to 50 employees in JP Morgan- Mumbai
branch.

 Age:
 Gender:
 Designation:

 What is the gender that you belong from?

Options Total respondents

Male 50
Female 50

 What is the age group that you belong from?

80
 Options Total respondents
25 to 30 years 50
30 to 40 years 50
More than 40 years 50

 How far do you believe that the financial condition of Bear Stearns was stable
before the crisis in 2007-2008?

Options Total respondents

Strongly believe 50
Believe 50
Neutral 50
Disbelief 50
Strongly disbelief 50

 How far do you believe that the strategies taken by Bear Stearns during the crisis of
2007-2008 were Suitable?

Options Total respondents

Strongly believe 50
Believe 50
Neutral 50
Disbelief 50
Strongly disbelief 50

 How far do you believe that credit crunch and subprime mortgage lending were the
main reasons behind the financial crisis in 2007-2008?

Options Total respondents

Strongly believe 50
Believe 50

81
 Neutral 50
Disbelief 50
Strongly disbelief 50

 How far do you believe that undertaking of Bear Stearns was profitable for JP
Morgan?

Options Total respondents

Strongly believe 50
Believe 50
Neutral 50
Disbelief 50
Strongly disbelief 50

 How far do you believe that Bear Stearns was undervalued by your company at the
time of purchase?

Options Total respondents

Strongly believe 50
Believe 50
Neutral 50
Disbelief 50
Strongly disbelief 50

 How Far market position of JP Morgan was affected by the purchase of Bear
Stearns?

Options Total respondents

Highly affected 50
Less affected 50
Not affected 50

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83