Bear Stearns

Decent Essays
Question 5
Yes I believe Bear Stearns failure coupled with Merrill Lynch’s acquisition by Bank of America and Lehmann Brother demise put a negative spin on pure play investment banks whilst highlighting the benefits of the Universal Bank model.
Pure play investment banks face multiple concerns about their model. Regarding their source of funding, they typically relied on short term funding, especially repo transactions, when this source dried up in the case of Bear Stearns, it led to serious problems. Pure play investment Banks have had to utilise unsecured long term financing, which in turn leads to increased cost of capital.
Concerning increased cost, this adversely affects profitability. Pure play investment banks are facing a reduced demand
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Reduced short-term interest rates caused the cost of borrowing to be cheaper for everyone, financial institutions and individuals alike. With Tech stocks valued very lowly, investors flocked en masse to the booming real estate sector, coupled with a huge amount of cheap credit and the Federal Government’s deep seated policy of home ownership for low income families, there was an explosion of commercial and residential loans being taken out by almost everyone (Oregon Law Review, 2011).
I am citing the dot com bubble because the Feds kept interest rates at a low rate for too long, with the Federal funds rate at below 2% until almost 2005, which fed the development of the housing bubble.
The Feds eventually started raising rates but by then it was already too late, the Federal funds rate eventually hit 5% in 2006 and the bubble burst (Federal Reserve, 2010).
The Feds also played a critical role in the evolution of the financial crisis. Back in 2007, the Feds identified the issue of bursting the housing bubble and the rebound it would have on banks but wrongly assumed the markets problem was one of
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This law is usually blamed as being one of the critical deregulatory factors that led to the financial crisis. The important bits of the GLB act are that it repealed huge portions of the Glass Steagall Act (NY Times, 1933), an act that was passed in response to the Great Depression. The Glass Steagall act made the separation of commercial and investment banks compulsory. It has been argued that the repeal of this act through the GLB allowed banks get too big and the credit crisis might have been averted if the GLB had not being enacted (NY Times, 1933).
Without the GLB act, Bank of America and Citigroup would not exist today in their current model. Although, European Banks which are arguably more firmly regulated and have their version of the Glass Steagall Act, were not immune from the financial crisis either. All that is to say, the credit crisis might have still occurred even if Glass Steagall was in place, over/under regulation is not the answer, allowing an efficient market to correct itself is much more
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