Bear's failure case

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 Liquidity constraints in the manufacturing manufacturing market can lead to a lack of investment 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 epected to have many illiquid assets. !hese illiquid assets have some value which can be liquidated in the case of adverse situations. "owever, the entire purpose of investment banks is to make financial transactions more liqui liquid, d, easil easily y trans transfer ferra rable ble,, and flei fleible ble for for the buy buyer er and sup suppli plier er.. #hen #hen the marke markett  perception of investment bank liquidity is low, there is less desire to do business with that company company.. !he difference between the assets an investment bank holds and its liabilities makes it essential that the asset on the balance sheet is etremely liquid. "ence providing liquidity to its clients is of etreme importance to investment banks. !he collateralised debt obligations $%&'s( are a good eample of a market where liquidity was a ma)or 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. *or investment banks, illiquid assets can lead to the demise of the company as seen with +ear tearns and also with the L!%M L!%M hedge fund. 4. How could Bear have addressed perceptions of its liquidity? ould it have stopped the run on the bank! and if so! how?

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A potential potential way to address the perception of illiquidity would have been to make clear to the market soon after the investigation by the -% that they still had /0 billion in cash reserves and so no serious liquidity problems. !herefore if +ear tearns 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. !hey 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 %ioffi1s hedge fund initially failed. Another way to potentially have stopped the run on the bank would have been to accept the / billion for /2 per cent of the company by 334. Although Although there were management fears that it would lose them business from competitors, moving back to the idea of  trader1s perception it would have presented stability in the business and an increase of  capital that could have reduced fears of an illiquid business. !here were some small incidents which led everyone to believe in the rumours and could have been avoided. &uring the conference call, %ayne stepped out to speak with an attorney regarding pector1s resignation. %ayne later returned to the room, but callers

were not told this, contributing to the impression of %ayne as a disinterested, absentee %-'. *orcing out pector to show that things were once again under control departure may have done more harm than good.