3.

Is market perception of liquidity more important for an investment bank than it is

for a traditional manufacturing or distribution business?
Yes, market perception of liquidity seems way more important for investment banks than it is
for both traditional manufacturing and for distribution businesses.
Liquidity constraints in the manufacturing market can lead to a lack of investment which can
limit the growth of companies. Although this can be damaging for companies especially ones
that have recently started up, it does not have the same impact as in the financial sector where
due to the size of the financial transactions it has such a heightened effect. Moreover,
manufacturing or distribution businesses are expected to have many illiquid assets. These
illiquid assets have some value which can be liquidated in the case of adverse situations.
However, the entire purpose of investment banks is to make financial transactions more
liquid, easily transferrable, and flexible for the buyer and supplier. When the market
perception of investment bank liquidity is low, there is less desire to do business with that
company. The difference between the assets an investment bank holds and its liabilities
makes it essential that the asset on the balance sheet is extremely liquid. Hence providing
liquidity to its clients is of extreme importance to investment banks. The collateralised debt
obligations (CDOs) are a good example of a market where liquidity was a major factor and
with the issuing of subprime mortgages this quickly turned into an illiquid market which was
one of the largest contributors to the financial crisis. For investment banks, illiquid assets can
lead to the demise of the company as seen with Bear Stearns and also with the LTCM hedge
fund.
4. How could Bear have addressed perceptions of its liquidity? Could it have stopped
the run on the bank, and if so, how?

A potential way to address the perception of illiquidity would have been to make clear to
the market soon after the investigation by the SEC that they still had $21 billion in cash
reserves and so no serious liquidity problems. Therefore if Bear Stearns were able to
make it clear to the public at the earliest opportunity what their financial position was
they may have been able to buy themselves some time.
They could have stopped the run on the bank by cutting the massive mortgage inventory
and the bonds that backed them at a far earlier stage arguably as soon as Cioffis hedge
fund initially failed.
Another way to potentially have stopped the run on the bank would have been to accept
the $2 billion for 20 per cent of the company by KKR. Although there were management
fears that it would lose them business from competitors, moving back to the idea of
traders perception it would have presented stability in the business and an increase of
capital that could have reduced fears of an illiquid business.
There were some small incidents which led everyone to believe in the rumours and could
have been avoided. During the conference call, Cayne stepped out to speak with an
attorney regarding Spectors resignation. Cayne later returned to the room, but callers

were not told this, contributing to the impression of Cayne as a disinterested, absentee
CEO.
Forcing out Spector to show that things were once again under control departure may
have done more harm than good.