Bear Stearns' culture of risk-taking and unwillingness to compromise contributed initially to its success but ultimately led to its downfall. While diversifying risk and cutting losses earlier in its mortgage-backed funds may have helped, broader issues with pure-play investment banks and lack of adequate regulation also undermined Bear Stearns' viability. The Federal Reserve plays an important role in financial market stability through improved supervision and carefully considered intervention during crises to prevent severe economic consequences.

1. StudentNumber- 100013817
1
NBS – 3A8Y International Financial Services – Coursework:
Bear Stearns Case Study
1. What role did Bear Stearns’ culture play in its positioning vis-à-vis its
competitors, and what role might that culture have played in its demise?
Atkinson (2006) highlights the value culture can have for an organisation arguing how it is
central for a business’s success and it is essential to build and shape a resilient culture. In
Bear Stearns’ early life this would appear to be something that helped a significant amount to
their success. As Madura (2012) describes how economic growth, interest rates and industry
conditions are for the most part out of the control of the organisation whereas management
abilities and culture are something the organisation has complete control over and can be
used to shape a competitive advantage.
Bear Stearns’ culture was very much tenacious and ‘cutthroat’ with one of their former CEO
Alan Greenberg stating “we are really looking for people with PSD degrees meaning poor,
smart and with a deep desire to become very rich” (Stowell, 2008, pg.3). Bear Stearns were
willing to employ people regardless of their background as long as they had the ability to
perform well and contribute to the company. This culture for a substantial period of time gave
them an edge over competitors as unlike other financial institutions who were said to be made
up of the stereotypical WASP people, who were for the most part born into wealth and
power, the staff at Bear Stearns were not and so were arguably highly motivated and possibly
more willing to take risks. In the early life these risks and the tenacious culture paid dividend,
during the Great Depression they continued to pay bonuses with their use of government
securities and even on Black Monday they showed their resilience when the Dow Jones
plummeted (Stowell, 2008). The seeming attitude of almost wanting it more led them to a
dominant position in bond trading and initial growth far greater than their competitors.
However it could be argued that their culture did play a part in the demise of the company,
their cutthroat attitude was seen most clearly with their refusal to help in the bailout of Long
Term Capital Management (LTCM). With fourteen of their competitors helping in the
Federal Reserve’s bailout of LTCM, Bear Stearns still refused to help even calling in a short-
term debt of $500 million (Stowell, 2008). The unwillingness to help LTCM would later
come back to haunt them with JP Morgan Chase defaulting them when their own asset
management came into difficulties. The culture that had to begin with led to so much success
would appear to have contributed to their failure; their consistent refusal to give in would also
lead to problems with their continued faith in Ralph Cioffi when it would appear clear that his
plans would not be profitable especially with his 100x leverage on the High-Grade Structured
Credit Strategies Fund.

2. StudentNumber- 100013817
2
2. What could Bear Stearns have done differently to avoid its fate?
 In the early 2000’s
There are several issues that can be highlighted that Bear Stearns may have completed
differently to avoid their fate. Starting with a couple of years previously in 1998 Bear
Stearns could have helped with the bailout of LTCM, this would have had enhanced their
reputation and may have prevented JP Morgan Chase from defaulting them when their own
hedge fund grew issues.
In the early 2000’s arguably one of the most significant actions Bear Stearns could have
taken would have been to spread their risk more widely with regards to their hedge fund.
Alan Schwartz was recorded as raising issues on the matter but was said to have been
ignored (Stowell, 2008). Ackermann et al (1999) highlights the risk that hedge funds can
have despite the high returns and also mentions that higher diversification will lower
volatility. This would appear to be something Bear Stearns did not do and instead
concentrated their risk. Furthermore in 2006 with the collapse of the housing market in the
USA Cioffi’s trades became unprofitable however instead of attempting to cut his losses
earlier with his 35x leverage he raised a new fund with a 100x leverage. This can be linked
back to the cultural aspect of Bear Stearns with regards to their willingness to carry on
against the odds, however they need only look back to LTCM who were placed under
serious financial strain with a mere 26x leverage and eventually had to be bailed out.
Writing off Cioffi’s fund at a much earlier stage would appear to have been the better
solution here with the added factor that many subprime mortgages were beginning to be
handed out and so increasing home owners beginning to default.
 During the summer of 2007
In the summer of 2007 one possible way that may have helped their fate would have been
how their CEO Cayne had handled the situation especially with regard to the media’s
perspective. Tyler and Stanley (2007) mention the idea of trust in financial services and how
it is important that there is a sense of confidence in how a partner acts. With regards to Bear
Stearns and how Cayne acted it would seem to provide anything but trust. The question and
answer session that he was involved in portrayed the image of a disinterested CEO (Stowell,
2008). As Cayne was for various parts of Bear Stearns’ crisis attending to matters elsewhere
a Q&A meeting may have better come from a person that was much more involved such as
Schwartz, Greenberg or even Cioffi. Quarantelli (1988) mentions the importance of clear
and concise communications in crisis management. This would have been beneficial to Bear
Stearns particularly to portray an image that all was well, where in the market that they
operate customer speculation can have a large impact on the success or failure of a business.
 During the week of 10th March, 2008
In the week of 10th March there would appear to be very few options available to Bear
Stearns with the market very much against them. However one possible way that may have
bought them some more time would have been to release a statement on Monday soon after
Moody’s downgrading. The statement could have been honest about the situation of the
company but also attempting to be reassuring at the same time, bringing back the notion of
trust. This would have meant there was no need to go on the CNBC show where the company
was crippled by the questions posed. Especially with communication at an all-time high due
to technology, there may have been a less damaging way to present the position of the
company such as on social media or even releasing a lengthy statement. Whether this would

3. StudentNumber- 100013817
3
have led to Bear Stearns avoiding their fate is debateable, however it may have bought them
time and rescued their reputation slightly which one trader mentions as a reason to not “get
into bed with these people” (Stowell, 2008).
3. Is market perception of liquidity more important for an investment bank than it
is for a traditional manufacturing or distribution business? If so, why?
Market perception of liquidity would appear to be more important to investment banks
compared to manufacturing or distribution businesses. Borio (2000) highlights some of the
reasons that market liquidity is important in the financial sector as there is an increased use of
asset pricing for policy setting and therefore the validity of the pricing relates strongly to the
market discipline, furthermore it is heavily used in risk management. Illiquidity can also have
a far more detrimental effect in the financial market with Bear Stearns being a clear example
as they had $56 billion in mortgage holdings which were extremely illiquid and resulted in a
chaos trade (Stowell, 2008).
That is not to say however that liquidity is not important in the other industries. Chow and
Fung (1998) describe how 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.
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. Borio (2000)
mentions the enormous difficulty there can be in solve illiquidity within a market.
Highlighting the fact that although liquidity may stunt growth in manufacturing and
distribution and limit their trade to a certain extent it does not have the wider impact
compared to an investment bank where 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 Stearns have addressed perceptions of its illiquidity? 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. Marsh et al (2004) describes how perceptions will
determine trader’s actions and their behaviour. 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. One possible way that they could have stopped the
run on the bank would have been to cut the massive mortgage inventory and the bonds that
backed them at a far earlier stage arguably as soon as Cioffi’s hedge fund initially failed.

4. StudentNumber- 100013817
4
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 (Stowell, 2008). Although there were
management fears that it would lose them business from competitors, moving back to the
idea of trader’s perception it would have presented stability in the business and an increase of
capital that could have reduced fears of an illiquid business.
Despite the market conditions seemingly working against them there would appear to be a
few actions they could have taken to potentially save the company despite Schwartz being
quoted as saying in Kelly (2007, pg 1) “I have not been able to come up with anything, even
with hindsight.” Kelly (2007) would appear to sum it well in that during the same difficult
period other trading companies did not fail and while the financial market struggled it did not
collapse. It would therefore seem to be a fundamental problem with the management of Bear
Stearns and their failure to recognise and adapt especially mortgage securities at an early
stage.
5. Did Bear Stearns’ failure undermine the viability of so-called “pure-play”
investment banks?
The notion of “pure-play” is that a business invests their resources on one particular line of
business, which can result in potentially higher rewards when conditions are in their favour
but is also accompanied by higher risk when the conditions are not. This was the case for
Bear Stearns, where the business was originally focused solely on bond trading and with their
being a bull market they saw massive increase in growth. They then moved their attention to
the CDO and mortgage obligations and again saw the same initial success, however with the
emergent of the bear market they suffered huge losses and with a limited diversification in
their portfolio they had little ability for recovery. As highlighted earlier by Ackermann et al
(1999) diversification will lower volatility. This would seem particularly important in
investment banking and the financial sector with the nature of the business being very
unpredictable and with such vast volumes of money being traded having a pure play business
would appear a very risky strategy.
Bear Stearns’ failure would therefore appear to undermine the ability of pure-play investment
banks. A comparison could be made with Citigroup in that they went through a serious
financial struggles and received many fines however as they were a diversified bank
operating in multiple fields they were able to survive and continue operations (Lynch 2012).
Although pure play can be successful it would appear to depend on the market that the
business operates in. For investment banks operating in a volatile market pure-play would
appear to be a strategy that in the long run will not be beneficial, highlighted clearly by Bear
Stearns as with the collapse of the housing market they had no real source of substantial
income. DeYoung (2001) also shows how pure play internet banks are struggling to make as
much profit compared to other high street banks. Again bringing into question the viability of
pure-play and it would appear to not be the most successful strategy in the financial market.

5. StudentNumber- 100013817
5
6. What role should the Federal Reserve play in maintaining order in world
securities’ markets?
The role the Federal Reserve (Fed) should play is often debated with their role in the Bear
Stearns collapse being criticised and potentially opening the floodgate for other investment
banks to act in careless way as they believe they could just get bailed out. It could therefore
be argued that the role of the Fed should be to improve their supervision of the market and
prevent themselves from being put in a situation that could have damaging consequences.
Bernanke (2009) discusses the ways the Fed should supervise firms in that they need to be
able to identify risks sooner using multiple disciplines of surveillance tools. Identifying risks
sooner would enable the prevention of a situation getting out of control to the point of where
a bailout is necessary, however if that point does arise the question is then whether the Fed
should intervene or not?
The argument for intervention by the Fed in the case of Bear Stearns is that it would “prevent
financial Armageddon” (Stowell, 2008, pg.12). Taylor (2009) has the argument that the
financial crisis was worsened by the fact that the Fed failed to bailout the collapse of Lehman
Brothers. It would therefore seem that although it creates moral issues that investment banks
can be careless in how they act, letting them fail would have worse long term economic
effects and so where it is essential the Fed should intervene. As Cecchetti (2009) describes
how the Fed were put into a difficult situation with the massive effect subprime mortgage
were having on banks, they were set to lose hundreds of billions of dollars which in turn
would prevent them lending out any money. In a situation like this it would appear that the
Fed has no option but to intervene due to the potential consequences it could impose.
Looking to the long term arguably the best course of action for the Fed may be to focus on
their role of supervision and imposing new measures and regulation that will prevent them
from being put into a situation similar to Bear Stearns again.

6. StudentNumber- 100013817
6
References
Ackermann, C., McEnally, R. and Ravenscraft, D. (1999). The performance of Hedge Funds:
Risk, Return, and Incentives. The Journal of Finance. Vol. 54 (3). Pp. 833-874.
Atkinson, P. (2006). Creating Culture Change. Jaico Publishing House.
Bernanke, B. (2009). Financial Regulation and Supervision after the Crisis: The Role of the
Federal Reserve. Chatham, Massachusetts.
Borio, C. (2000) Special feature: market liquidity and stress: selected issues and policy
implications. BIS Quarterly review. pp. 38-51.
Cecchetti, S. (2009). Crisis and Responses: The Federal Reserve in the Early Stages of the
Financial Crisis. Journal of Economic Perspectives. Vol 23 (1). pp. 51-75.
Chow, C.and Fung, M. (1998). Ownership structure, lending bias and liquidity constraints:
Evidence from Shanghai’s manufacturing sector. Journal of Comparative Economics. Vol. 26
pp. 301-316.
DeYoung, R. (2001) The financial progress of pure-play internet banks. BIS papers. No. 7.
Lynch, R. (2012). Strategic Management. 6th edition. Essex. Pearson Education Ltd.
Kelly, K. (2007). Bear CEO’s handling of crisis raises issues. Wall Street Journal,
November, 1, 2007. Available at: <http://www.livawards.org/pdf/2008/LostReduced.pdf>
[Accessed 23/12/14].
Marsh, J., Pennings, J. and Garcia, P. (2004). Perceptions of futures market liquidity: An
empirical study of CBOT & CME traders.
Madura, J. (2012). Financial Institutions and Markets.10th edition. South-Western Cengage
Learning.
Quarantelli, E. (1988). Disaster crisis management: A summary of research findings. Journal
of Management Studies. Vol. 25 (4) pp. 373-385.
Stowell, (2008). Investment Banking in 2008 (A): Rise and Fall of the Bear. Kellogg School
of Management. Northwestern University.
Taylor, J. (2009). The financial crisis and the policy responses: An empirical analysis of what
went wrong. National Bureau of Economic Research.
Tyler, K. and Stanley, E. (2007). The role of trust in financial services business relationships.
Journal of Services Marketing. Vol. 21 (5) pp. 334-344.