Prof.

Florencio Lopez-de-Silanes

JP Morgan Chase and Bear Stearns; The Tip of the Iceberg

Case Questions

Please try to provide answers with as much numerical backing as possible. You can consult and cite
external sources for additional information that would help you answer the questions. You can also consult
and cite additional sources in order to find information or make numerical assumptions you need to answer
questions.

Case materials:

- The Tip of the Iceberg: JP Morgan Chase and Bear Stearns (A), Harvard Business School, 2011.
Case and Spreadsheets.
- The Changing Nature of Financial Intermediation and the Financial Crisis of 2007-09, Tobias Adrian
and Hyun Song Shin, Federal Reserve Bank of New York Staff Report no. 439, April 2010
- Liquidity and leverage, Tobias Adrian and Hyun Song Shin, Journal of Financial Intermediation
(19), 2010.
- Flow of Funds Accounts of the United States, Federal Reserve Board, Flows and Outstandings (Z.1)
reports 2008Q3 and 2008Q4. https://www.federalreserve.gov/releases/z1/default.htm

Questions:

1. Banks then and now: (a) Consider a commercial bank circa 1973. What would each side of its
balance sheet have looked like? (b) Consider an investment bank circa 1973. What would each side
of its balance sheet have looked like? (c) What activities did Bear Stearns undertake? Was it a
commercial bank or an investment bank?

2. Adequately capitalized institutions: SEC Chairman Christopher Cox noted that Bear Stearns was an
adequately capitalized institution as of March 10, 2008. (a) Do you agree with his assessment? (b)
What standard is being used to determine whether or not Bear was adequately capitalized? (c) How
does Bear’s capitalization compare to other similar firms? (d) How are the capitalizations of financial
institutions changing over the period prior to the crisis at Bear Stearns? Why? (e) Are well-
capitalized financial institutions invulnerable to crisis?

3. Financing Mix: (a) How does Bear’s mix of financing sources compare to other similar financial
institutions? (b) Is there any evidence prior to the crisis that Bear is having a hard time accessing
repurchase markets as readily as other firms?
4. Financial Distress and Bankruptcy: (a) What mix of businesses is Bear involved in? (b) How will
Bear’s assets go through bankruptcy? (c) How would Bear’s value be affected by a potential
bankruptcy?

5. Pricing: What price would you pay for Bear’s ongoing business? Please provide numerical analysis
to back up your answers. This could include multiple methods of valuation that you develop
yourself.

6. JPCM: Evaluate the mechanisms used to manage JPMC, and how they enhanced or impeded their
position as the bank best positioned to buy Bear Stearns. (a) What worries you about JPMC’s
balance sheet? (b) Was JPMC strong enough for the government to turn to for help? (c) What aspects
of how JPCM is managed struck you? (c) What worries you about the control, processes and
incentives of JPCM?

7. From a commercial perspective, what are the pros and cons for JPMC of buying Bear?