JP Morgan Chase and Bear Stearns

RAMID Souhail
Banks then and now: 1-(a) Consider a commercial bank circa 1973.
What would each side of its balance sheet have looked like?

• A commercial bank takes deposits from customers and makes loans from the deposits.
• Profit is made from the interest rate spread.
Spread= Interest paid - Interest received
• The assets of balance sheet of a commercial bank in the past would be composed
1. Cash and cash equivalents that vary from cash vault, treasury securities and required
reserves ,
2. Large amounts of loans receivables made to customers.
Banks then and now: 1-(a) Consider a commercial bank circa 1973.
What would each side of its balance sheet have looked like?
HSBC Example
• Loans receivables to customers represent the largest
proportions of assets with 50.97%.
• Small amount of intangible and fixed assets
• Regarding the liabilities of a commercial bank, it is
mainly composed of customer deposits in addition to
government and interbank deposit
• HSBC’s customers’ deposits consisted 62.37% of total
liabilities
• Deposits represents the largest proportion of total
liabilities.
• Commercial banks benefit from the discount window
which is a monetary instrument is allowing the
commercial bank to take loans from the central bank.
• Since it was impossible to find financial statements of a HSBC Balance Sheet
commercial bank in 1973, I relied on the balance sheet
of HSBC in 1997
1-b) Consider an investment bank circa 1973. What would each side of
its balance sheet have looked like?

• Investment bank, different from a commercial, bank trades with securities.

• An investment bank buys securities from firms, financial institutions, and governments
and sells them to investors.
• Therefore, the assets of an investment bank is composed of securities from debt (bonds,
mortgage) to equities (stocks).
• Financial instruments such as derivatives are part of the assets
• Regarding the liabilities of an investment bank,
1. Short term borrowings and repurchase agreement (Repos) to finance daily activities
2. Loaned collateralized securities
1-b) Consider an investment bank circa 1973. What would each side of
its balance sheet have looked like?
Goldman Sachs Example
• Goldman Sachs’ securities in 1998 consisted 49.06%
of total assets
• Loans receivables different from commercial banks
from customers consisted only 6.88%.
• Goldman Sachs short term borrowings consisted
13.00%
• Repos consisted 17.18% of total liabilities twice than
long-term borrowings (9.43%)
• Derivative contracts were about 11.72% of total
liabilities.
• The investment bank cannot access the discount
window provided by the Fed Reserve Bank.
Goldman Sachs Balance Sheet
1-b) Consider an investment bank circa 1973. What would each side of
its balance sheet have looked like?

Commercial Banks Assets

• Cash and cash equivalents

• Loans Receivable to Customers

Investment Bank Assets

• Securities
• Derivatives
1-b) Consider an investment bank circa 1973. What would each side of
its balance sheet have looked like?

Commercial Banks Liabilities

• Deposits Customers
• Discount Window from the Central Bank

Investment Bank Liabilities

• Short Term Borrowings

• Repurchase Agreements
• Loaned Collateralized Securities
1-(c) What activities did Bear Stearns undertake? Was it a commercial
bank or an investment bank?
Bear Stearns undertook three main activities:
• Capital Markets: brokerage services, market making, trading in both equity and fixed Income, investment
banking such as securities issuance and M&A advisory
• Global Clearing Services: well-regarded prime brokerage business
• Wealth Management: serving and managing worth individuals
 Those activities are performed by an Investment Bank
Bear Stearns in 2007:
• Holds 27.85% of borrowed and purchased securities of total assets.
• Holds only 10.40% of customer deposits of total assets.
• Has $102 billion worth of repo borrowing on its balance sheet and 69$ billion of long term debt
• Finances their borrowings through bank loans collateralize
 Bear Stearns was operating as an investment bank since it undertook activities mainly related to selling
and buying securities instead of taking deposits and giving loans.
 2- 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?
• I do not agree with Mr. Chairman Christopher Cox that Bear Stearns was an adequately
capitalized institution as of March 10, 2008.
• On March 10th 2008, Bearn Stearns was facing three problems.
1. Short-term financing that should remain constant in order to pursue financing the
securities positions and trade with counterparties. If Bear filed for bankruptcy, these
counterparties may not instantly be allowed to sell all collateral to repay themselves.
2. Refusal of counterparties to trade or demand to increase security because they are at risk
of some loss. The counterparties might not access their cash or securities
3. Hedge funds managers would refuse to keep securities and cash at a frim under
financial distress since the court would freeze the movement of the securities that the
hedge funds were holding at Bear’s prime brokerage operation.
 2- b) What standard is being used to determine whether or not Bear
was adequately capitalized?

There are many standards used to determine if Bear is adequately Interest Coveage Ratio
capitalized. 2008 2007 2006 2005 2004
1,08 1,02 1,43 1,53 2,26
• Interest coverage ratio,
• Cash ratio,
• Gross leverage ratio,
• Tier 1 capital ratio, 2008 2007 2006 2005 2004
Tier 1 Capital 15575 14964 14508 12159 10358
• Total Liquidity as Percentage of Repo Financing, and Tier 1 Capital Ratio 3,90% 3,78% 4,14% 4,16% 40,47%
Cash Ratio 0,174 0,164 0,097 0,061 0,051
• Total Liquidity as Percentage of Net Repo Financing.
 2- b) What standard is being used to determine whether or not Bear
was adequately capitalized?

1. Interest coverage ratio of Bears has been decreasing since 2004 from 2.26 to 1.02 in 2007  shows that Bears is facing
difficulties to pay interest and outstanding debt
2. The cash ratio has always been under 1 over the period 2004-2008. The firm is lacking cash to pay its short term
borrowing.
3. Tier 1 Capital Ratio: a dramatic decrease from 40% in 2004 to 3,78% in 2007
4. Gross leverage ratio experiences an increase of 6% in 2 years from 28% in Aug 2006 to 34% in March 2008
5. Total Liquidity as Percentage of Repo Financing, and Total Liquidity as Percentage of Net Repo Financing are around 34%
and 47% which demonstrates the high exposure to Repo financing Bear is facing an illiquidity to cover it borrowing under
the repurchase agreements.

Total Liquidity as Percentage of Repo Financing 34%

Total Liquidity as Percentage of Net Repo Financing 47%
 2- c) How does Bear’s capitalization compare to other similar firms

By comparing Bears, to Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley,
• Bears’ liquidity (defined as cash +liquid assets + unencumbered asset borrowing value) is the lowest in 2017. It
is equivalent to $35.5 billion. The closest is Morgan Stanley with $118 billion which is three times. Bears’
Liquidity Ratio is 171% the lowest compared to competitor and similar investment banks.
(in $ billion) Bear Steams Goldman Sachs Lehman Brothers Merrill Lynch Morgan Stanley
Total Liquidity (defined as cash +liquid assets + 35.3 168.6 169.8 181.9 118.0
unencumbered asset borrowing value)
Liquidity Ratio (defined as Total Liquidity / Short-term 171% 236% 790% 248% 181%
Unsecured Debt)

• Regarding Total Liquidity as Percentage of Net Repo Financing which shows the ability to cover the
borrowing made under the Repos, Bear is experiencing the worst ratio with 47% compared to Goldman Sachs
with 230% and Morgan Stanley with 328%.
(in $ billion) Bear Steams Goldman Sachs Lehman Brothers Merrill Lynch Morgan Stanley
Total Liquidity as Percentage of Repo Financing 34% 106% 93% 77% 72%
2- d) How are the capitalizations of financial institutions changing over
the period prior to the crisis at Bear Stearns? Why?

• When there is a housing boom, the price of the assets increases.  the balance sheet of the financial institutions is stronger
and inflated.
• The financial institutions possess large capital surplus.  Find a way to deploy these surplus and make profits from that
capital by increasing their balance sheets.
• Plunge in taking short-term debt and repurchase agreement on the liabilities side whereas looking for potential borrowers on
the assets side.
• In the pre-crisis period, even the borrowers who does not meet the repayment conditions benefit from the loans since the
will to deploy the surplus capital and make profit from it.,
• More capital is utilized in increasing trading positions through chasing yield and investing in derivatives.
• Goldman Sachs’ balance sheet over the period 2001-2005 expanded at a high rate. The securities borrowed and purchased
under the assets’ section increased from $128,700 billion in 2001 to $200,000 billion in 2005, a growth of 55.3%.
• The repurchase agreements, the securities loaned, and the securities sold increased from $46,000 billion in 2001 to $66,000
billion in 2005, a growth of 43.48%.
• The short-term borrowing increased from $37,597 billion in 2001 to $54,000 billion in 2005, a growth of 43.62%.
 2- d) How are the capitalizations of financial institutions changing over
the period prior to the crisis at Bear Stearns? Why?
• Goldman Sachs’ balance sheet over
the period 2001-2005 expanded at a
high rate. The securities borrowed
and purchased under the assets’
section increased from $128,700
billion in 2001 to $200,000 billion
in 2005, a growth of 55.3%.

• The repurchase agreements, the

securities loaned, and the securities
sold increased from $46,000 billion
in 2001 to $66,000 billion in 2005,
a growth of 43.48%.

• The short-term borrowing increased

from $37,597 billion in 2001 to
$54,000 billion in 2005, a growth
of 43.62%.
2- e) Are well-capitalized financial institutions invulnerable to crisis?

Well- capitalized financial institutions are vulnerable to crisis

• Systemic risk: Even if the financial institution is well capitalized and regulatory capital, it cannot escape the systemic
risk.

• Interconnectedness is the key. Banks and financial institutions are interconnected. They are too interconnected to
fail. They rely on various means that are important and crucial for the financial system.

• One way is the derivatives that brings two bilateral contractors together.

• Another way is the prime brokerage. Financial institutions provide funding to hedge funds through securities. One
bankruptcy at a financial institution will impact the chain and cause disruptions. Thus, when the crisis happens, this
interconnectedness plays its role and impacts every key player in the chain.
 3- Financing Mix: (a) How does Bear’s mix of financing sources
compare to other similar financial institutions?
There are three main various mix financing sources for Bears.

• The first one is Fixed Income. fixed income represents the largest source of financing in 2005 and 2006
with $3.0 billion and $3.6 billion respectively compared to other sources such as investment banking,
equity, asset management and prime brokerage.
• The fixed income constitutes the mortgage-backed securities and subprime mortgages. In addition, Bears
is aggressive in terms of owning EMC Mortgages.
• Bears invests in Repurchase Agreement (Repos). Securities that are used as collateral for short-term
borrowings. These repurchase agreements are organized as sale securities to be purchased later at the short
maturity at higher prices.
 3- Financing Mix: (a) How does Bear’s mix of financing sources
compare to other similar financial institutions?
By comparing Bear to Goldman Sachs and Lehman Brothers, Bears mix financing sources are quite similar to
the ones of Goldman Sachs and Lehman Brothers.
• In 2007, the repurchase agreements for Bear represent 27% of total liabilities whereas Goldman Sachs 15%
and Lehman Brothers 27%.
• In 2007, the cash for Bear represents 5.27% of total assets whereas Goldman Sachs 12% and Lehman
Brothers 3%.
• In 2007, the securities borrowed for Bear represent 20.6% of total assets whereas Goldman Sachs 24.75%
and Lehman Brothers 19.97%.
• In 2007, the collateralized financing for Bear represents 27% of total liabilities whereas Goldman Sachs
23% and Lehman Brothers 38%.
 Bears Stearns financing sources does not differ from other similar financial institutions, However, heavy
rely on Repos compared to Goldman Sachs.
Bears Steams Goldman Sachs Lehman Brothers
Repurchase Agreements % Total of Liabilities 26,67% 14,80% 27,20%
Short Term Borrowing % Total of Liabilities 2,86% 6,60% 4,19%
Securities borrowed % Total of Assets 20,60% 24,75% 19,97%
Cash % Total of Assets 5,28% 11,62% 2,75%
Collateralized Financing % Total ofLiabilities 27,86% 23,42% 38,32%
3- (b) Is there any evidence prior to the crisis that Bear is having a hard
time accessing repurchase markets as readily as other firms?
• There is no evidence that Bear is having a hard time accessing
repurchase markets. Repurchase
Agreements

• On the contrary, Bear is experiencing easiness to access the Repurchase

Agreements
with Bear
Steams
repurchase markets. Fidelity Cash Reserves 29,323 370

• Indeed from 2004 to 2007, the repurchases agreements increase by Goldman Sachs money market funds* 29,105 1,000

74.68%. In addition, the Repos represent 26.66% of total liabilities

whereas for GS it represents only 14,80% which shows that Bear Schwab Value Advantage Money Fund 3,960 1,690

accessed easily that market. Schwab Cash Reserves 2,329 515

• The following table details Money Market Funds Assets and Schwab Advisor Cash Reserves 1,673 765

Repurchase Agreements with Bear Stearns. Goldman Sachs had $1 The Reserve Fund Primary Fund 2,950 1,450
billion Repurchase Agreements with Bear. Schwab had $2.97 billion
Repurchase Agreements with Bear. The Reserve Fund Primary II Fund 4,091 1,200

• The Reserve Fund Primary Fund had $1.65 billion Repurchase Dreyfus Cash Management Fund 3,733 300

Agreements with Bear. Money Market Fund 820 200

• These information prove that there was no evidence that Bear was
having hard time to access repurchase agreements. It was easy for
Bear to benefit from the Repurchase Agreements.
4- Financial Distress and Bankruptcy: (a) What mix of businesses is
Bear involved in?
• The mix of businesses Bear is involved in are
1. The capital markets,
2. The global clearing services, and
3. Wealth management.
• Bear acts as a financial intermediary in the capital market by channeling funds from the ultimate creditors to the
ultimate borrowers.
• For instance, Bear channels credits from the creditor (households’ savers) to the debtors who obtain the mortgage from
the commercial banks to purchase a house. Bear holds these mortgages in the form of Collateralized Debt Obligations.
• However, to finance these long-terms assets, Bear will engage through a heavy short-term borrowing such as
collateralized borrowings through repos with bigger commercial banks.
• The Bear’s mix of business involve commercial bank operations, investment bank activities, and hedge funds leverage
and investments.
 Debt Overhang caused by the illiquidity of assets (MBS): Bear could not take any additional debt to survive or
operate. Bear was burdened with a large amount of repos that needed to be paid on a short-term period. Rabobank Group
refused to renew its $500 million loan.
4- (b) How will Bear’s assets go through bankruptcy?
Bear’s assets will go through bankruptcy either under chapter 7 or chapter 11.

• Bear’s assets are sold off for cash based on their

liquidity values,
• The claims are redistributed to the claimers at
Chapter 7: priority order.
• Repos are associated with collateralized securities.
Liquidation: therefore, the following claimers liquidate the assets
at chapter 7 (see following table)
• Assets either are sold to the creditors or re-
hypothecated of their following hedge funds that
relies on Bears as prime broker.

• Bears Bank supervised by a judge, will

reorganize, and be sold to a new
Chapter 11: acquirer.
Reorganizatio • The assets are shifted to the new
acquirer company after solving the
n and Merge issue of Repos and short-term
borrowing with creditors.
 4- (b) How will Bear’s assets go through bankruptcy?
Bear’s assets will go through bankruptcy either under chapter 7 or chapter 11.
Fidelity Cash Reserves
Goldman Sachs money market funds*
Schwab Value Advantage Money Fund
Schwab Cash Reserves
Schwab Advisor Cash Reserves
The Reserve Fund Primary Fund
The Reserve Fund Primary II Fund
Dreyfus Cash Management Fund
Money Market Fund
Collateral for Bear Steams
Assets Repurchase Agreement
110,363 Mortgage Loan Obligations valued
at $389 million
99,705 U.S. Government securities worth
$1,000 million
The value of the collateral associated with the repurchase
59,684 U.S. Government securities worth agreements for every claimer
$1,724 million
26,162 U.S. Government securities worth Collateral value is about $7.717 billion
$525 million
21,439 U.S. Government securities worth
$780 million
38,787 ABS and CMOs worth $1,522.4
million
23,500 ABS, CMOs, and Freddie Mac
securities worth $1,254.9 million
23,225 Corporate bonds worth $308
million
10,418 Corporate bonds worth $206
million
 4- (b) How will Bear’s assets go through bankruptcy?
Altman Z-Score

Altman Z-score for Banks was calculated based on the following formula :

• Z = 6.56*(Net Interest Margin/Total assets) + 3.26*(Accumulated retained earnings/Total assets) +

1.05*(EBIT/Total assets) + 6.72*(Book value of equity/Total liabilities)

2008 2007 2006 2005 2004 Altman Z-Score was calculated and is
-0,001 -0,001 -0,001 -0,001 -0,010 Net Interest Margin/Total Assets less than 1.23 during the last 4 years
0,024 0,024 0,027 0,026 0,241 Accumulated Retained Earnings/Total Assets which demonstrate that the bank should
0,005 0,026 0,030 0,022 0,142 EBIT/Total Assets predict a bankruptcy and that assets
0,031 0,031 0,036 0,045 0,043 Book Value of Equity/Total Assets should be either liquidated or
0,283 0,304 0,353 0,402 1,158 Z-score reorganized. During the last year 2007,
the z-score was about 0.30 and started
decreasing since 2004 when it was
about 1.16. Since 2004, Bear was in
Financial Distress.
4- (c) How would Bear’s value be affected by a potential bankruptcy?

• Share price of Bear decreased dramatically in 6 months prior March 2008.

• It decreased from $115 in September 2007 to $30 in March 2008, a decline of -73.9%.

• Following the bankruptcy news, the market value of Bear decreased from $14 billion to $3.9 billion.

• In addition, the cash and the cash equivalent of the firm decreased which led to a decrease in the value of the bank.

• Following the news, the creditors, and the hedge funds rushed into pulling out their investment and liquidating the

firms’ collateral.

• To avoid the execution of the collateral, Bear is under pressure to meet the short-term borrowings and the repos

using the available cash.

• Cash is burnt; thus, the firm value decreases. Cash decreased from $18 billion to $5.9 billion, a decline of -67,22%.
 5. Pricing: What price would you pay for Bear’s ongoing business?
Dividends Discount Model

Compute Historical Dividends based on

• Dividends = (Beginning Retained Earnings + Net Income)- Ending Retained Earnings
2005 2006 2007 2008
Baginning RE 6177 7493 9385 9441
Net Income 1462 2054 233 115
Ending Retained 7493 9385 9441 9419
Dividends 146 162 177 137
Shares 130 132 130 129
Dividend Per Share 1,12 1,23 1,36 1,50
in million $

• Dividends Growth based on historical of growth 10.11% during the upcoming 5 years
• Terminal growth based on the growth of the assets during financial distress from 2007 to 2008: 0.009%
 5. Pricing: What price would you pay for Bear’s ongoing business?
Dividends Discount Model

Compute the Cost of Equity based on the Capital Asset Pricing

• Return of the market (Rm) based on the last 4 years,
• Risk free Rate based on the 5-years US treasury bills
• Beta computed through the regression of the excess return of Bear and the excess return of the market
Rf 2,80%
Rm 9,26%
Beta 1,8

• Cost of Equity equals 14.43%

Manhattan Building 1000
Merger Cost -6000
Synergy 1000
Energy Assets 500
Amounts in million $
 5. Pricing: What price would you pay for Bear’s ongoing business?
Dividends Discount Model
• On March 2008, Bear had $5.9 billion in cash.
• It still owed had $2.4 billion in cash to Citi Group
• Ending cash is equal to $3.5 billion
• Total cost is equal $3.5 billion
1 2 3 4 5
2009 2010 2011 2012 2013
1,6507 1,8176 2,0013 2,2037 2,4264
18,1264
1,4426 1,3881 1,3357 1,2853 10,4763
15,9281 Dividend Per Share
2166,2281 Fair Price

Amounts in million $

• Number of shares, as March 2008, is equal to 136 million shares.

• Price I would pay for Bear’s ongoing business is $2.2 billion using DDM
 5. Pricing: What price would you pay for Bear’s ongoing business?
Multiples Method

• Manhattan building: $1 billion

Manhattan Building 1
• Cost of the Merger: $6 billion Merger Cost -6
• Incremental Earnings: $1 billion Synergy 1
Energy Assets 0,5
Value Businesses according to Sanford Bernstein Estimation
Prime Brokerage 3
1. Prime Brokerage: $3 billion Merchant Banking 1,3
2. Merchant Banking: $1.3 billion Asset Managment 1,3
High Net Worth Brokerage 1
3. Asset Management: $1.3 billion Mortgage Servicing 0,6
4. High Net Worth Brokerage: $1 billion Total Value 3,7
5. Mortgage Servicing: $0.6 billion
Price I would pay for Bear’s ongoing business is
6. Energy assets: $0.5 billion $3.7 billion using Multiples
5. Pricing: What price would you pay for Bear’s ongoing business?

Dividends Discount Model

• Fair Price: is $2.2 billion

Multiples Method
• Fair Price: is $3.7 billion
 6) Evaluate the mechanisms used to manage JPMC, and how they
enhanced or impeded their position as the bank best positioned to buy
Bear Stearns
Mechanisms used to ENHANCE their position as the best bank best positioned to buy Bear
Stearns
• JPMC was a product of a multiple bank mergers  High market capitalization, diversified portfolio, geographical
expansion, global investment banking and asset management, leader in corporate lending, a significant retail banking
operation.
• The operating committee annual bonuses were defined through an assessment of quantitative and qualitative criteria such as
operating earnings, credit and risk management, building an inclusive culture, and quality of earnings. In addition, the
compensation of the heads of businesses units were based on the performance of their line and the entity  Boost the
operational performance of the bank .
• Development of a fortress balance sheet that respect the regulatory requirements by the central bank and exceeds the ones
of the competitors  Higher Assets to shareholders, lower leverage ratio, and higher market cap compared to the
investment banks
 6) Evaluate the mechanisms used to manage JPMC, and how they
enhanced or impeded their position as the bank best positioned to buy
Bear Stearns

Mechanisms used to ENHANCE their position as the best bank best positioned to buy Bear
Stearns
• A liquidity strategy composed of 4 components: large amount of cash capital, term financing, stress testing, and liquidity

reserves  Four components allow the JPMC to avoid illiquidity, increase liquidity, and qualify for an A credit rating for

each business line.

• The use of Conservative Accounting instead of aggressive accounting allowed the firm to strengthen their balance sheet and

avoid any substantial issue related to the unrealized revenues or bad debt expense.

• Using more common equity rather than preferred stock  Increase capital base, thus, increase investment.

• JPMA avoidance to develop CDO’s and exit the subprime market  less impact of industrial shocks compared to the other

financial institutions.
 6) Evaluate the mechanisms used to manage JPMC, and how they
enhanced or impeded their position as the bank best positioned to buy
Bear Stearns

Mechanisms used to Enhance their position as the best bank best positioned to buy Bear Stearns

• Revamp of JPMC’s own risk management processes. Hard limits on the aggregate level of contingent calls on JPMC liquidity
 Reducing the contingent call on liquidity .

• JPMC avoidance to invest in structured investment vehicles  Toxic Agreement, avoidance of losses, compared to other
financial institutions.
Mechanisms used to Impede their position as the best bank best positioned to buy Bear Stearns

• Exposure to mortgage markets through fixed income activities and retail banking by assuming home prices will go up 
allowance for loan losses in the mortgage business increased by 56%.

• High Loan to Value (LTV) on homes  High risky loans, JPMC loosens its standards , rise in price, increased loses.

•  More Mechanisms enhancing the position of JPMC as the best positioned to buy Bear Stearns than mechanisms
impeding it,
 6- a) What worries you about JPMC’s balance sheet?

There are two concerns that worry me about JPMC’s Balance sheet:
1. Earnings Per Share in Q1 of year 2008: EPS is a metric that captures and estimates the corporate value. In March 2008, EPS
equals $0.68 in the middle of a recession which predicts that the value of JMPC will be impacted but the shocks and its value
will decrease.
2. Allowance for loan losses: In three months, the allowance for loans losses increased dramatically from 1.78% in December
2007 to 2.29% in March 2008, an increase of 22.27% in three months which anticipates losses on loans for JPMC  Losses
will mount
Q1 2008 2007 2006 2005 2004
Allowance for loan losses (to total loans)
2,29% 1,78%1.51%1.69% 1.82%
Earnings per share, diluted $0.68 $4.38 $4.04 $2.38 $1.55
 6- (b) Was JPMC strong enough for the government to turn to for help?
JPMC was strong enough for the government to turn to for help
• The regulatory capital requirement are respected. JPMC has a Tier 1 capital ratio equals to 8.3% which is greater than the
required 6%.
• JPMC has a total capital ratio equals to 12.5% which is greater than the required 10%
• JPMC has a Gross Leverage ratio equals to 12.7% which is greater than the required 5%

Q1 2008 2007 2006 2005 2004

Tier 1 Capital $89600 86746 81055 72474 68621
Tier 2 Capital - 43496 34210 29963 28186
Tier 1 Capital Ratio 8.3% 8.4% 8.7% 8.5% 8.7%
Total Capital Ratio 12.5% 12.6% 12.3% 12.0% 12.2%
Gross Leverage Ratio 12.7% 12.7% 11.7% 11.2% 10.9%

The total deposits of total liabilities is equal to 50% on average which is a good indicator for deposits in a bank.

Q1 2008 2007 2006 2005 2004

Deposit % of Total Liablities 50,20% 51,48% 51,69% 50,84% 49,59%
 6- (b) Was JPMC strong enough for the government to turn to for help?
JPMC was strong enough for the government to turn to for help
• The assets growth on average is equal. The assets is growing over the period.

Q1 2008 2007 2006 2005

5,17% 15,58% 12,73% 3,60%

• JPMC achieved $16890 and $2373 respectively in Q1 of 2008.

• In 2007, JPMC achieved on average $17843 and $3841 respectively.
• There is a slight decrease due to the loss incurred in both investment bank and retail financial service divisions.
Nevertheless, it is normal for a firm hit by the industry shocks and in a middle of a recession.
• To conclude, JMPC was a strong bank impacted by the housing crisis since they hold mortgage loans,
 6- (c) What aspects of how JPCM is managed struck you?

• The use of the same set of financial reports and the proper economic reflection of each business unit in terms of revenues and
expenses
• The use a conservative accounting within the rules. A well managed bank should always take actions in accordance with the
accounting law.
• The one man management of Jamie Dimon, CEO of JPMC. The “one man bank” leadership of Jamie may affect the stock price
once he leaves the firm. The leadership of the bank was not based on involving other executives and tasks delegation.
• The development of a quantitative and qualitative matrix to ensure fairness when compensating executives and the heads
business units.
• The ability to admit making mistakes when pulling out from the SIV market and mispricing the housing industry. The
management admitted their unawareness about the toxicity of products.
• Building a strong financial statements. Financial statements are disclosed documents to shareholders and stakeholders.
• Acquisitions were executed based on various criteria (cultural, economic, operational) and not the sake of empire building.
• The omnipresence of an evaluation and correction after each execution and implementation.
6- (d) What worries you about the control, processes and incentives of
JPCM?

• The one man • Conservative • Employees Stock

Process

Incentives
Control bank Accounting
underestimates the
options.
management of value of the firm.
Jamie Dimon. • Stock Options
• Conservative can result in high
accounting decreases compensation.
• The CEO the options for the
committed to firm in terms of • Stock Options
hold 100% of bookkeeping.
can be costly for
his share may • The conservative shareholders.
lead to a closely accounting may
held bank and mislead the • Employees stock
less subject to shareholders. option have tax
the votes of implications 
• The conservative No cash to pay
shareholders. accounting imposes taxes.
the writing down of
the assets.
7. From a commercial perspective, what are the pros and cons for
JPMC of buying Bear?
Pros:
-Incremental Earnings resulting from
synergy;
-Federal Reserve Bank Support;
-Decrease of cost operations;
-Geographical and market expansion;
-A low price per share;
-Cost of capital reduction;
-Lower taxes;
Cons:
-Negative cumulative abnormal
returns for the acquirer shareholders;
-Acquisition of Bear’s credits and
borrowings; (some toxic product)
-Uncertainty and high risk in terms of
future cash flow
-JPMC Share price decrease;
-Acquiring Bear’s illiquid assets;
-Lay off employees through
restructuring ;
 Thank You !

RAMID Souhail