Executive Summary
JP Morgan is considered to be a global financial leader in the promotion of wealth asset management services; it is a huge international corporation operating on the market over decades and succeeding in private banking and asset management worldwide.
JP Morgan is remarkable for its remarkable strategic planning and successful financial operations making it gigantic wealth service promoter; nevertheless, the start of significant strategic shift appeared to be the path to one of the most profound and destructive credit crisis in the world history.
JP Morgan Company Brief Overview
Financial Corporation is concentrated on the particular client groups on the basis of developed businesses: private bank for high net worth clients, private wealth management for the same group of clients, and asset management for retail clients and institutions.
It is necessary underline the fact that JP Morgan has about $1.7 trillion assets under supervision and more than $1.3 trillion under management, which makes it to be the largest wealth and asset managers throughout the world. It is necessary to stress that financial system is aimed at providing choice for individual investors, institutions and financial intermediaries. The most important features characterizing JP Morgan are considered to be the following:
- It has leadership position in such parts of the world as Asia, Continental Europe, UK, USA, and Japan;
- It concentrates on client asset management and provide strong risk-adjusted returns;
- About 650 investment professionals are involved in the business operation process developing about 200 different strategies.
The success is completely dependant on thoroughly developed approaches and strategies in customers’ treatment and financial operations.
The Road to Crisis
The analysis of financial institution’s financial operations and strategies gave an opportunity to evaluate its immediate crisis; in accordance with analytics, the crisis was considered to be the collapse of the whole banking system. ‘The primary culprit was a wholesale banking market where borrowing was made to the wrong people at the wrong price’, as it was said by Bill Winters, JP Morgan co-chief executive. (JP Morgan’s London head slams ‘greed’ of bankers, 2009) According to the analysis of strategic choices, the central causes of the crisis are closely connected with wrong steps made by investors, borrowers, and greedy bankers; besides, the fault was made by inept risk managers relying on rating agencies. The comments, provided by Winters, were based on the collective legislation agreeing outlawing bonuses being perceived as excessive.
The road to crisis was built through inappropriate and ineffective actions of the banking system members. JP Morgan operations in 2005 made the bank be a small player in the system of Wall Street hottest business, concentrated on securitizing mortgages. Nevertheless, in 2006 the bank took more powerful position, dabbling the subprime CDOs; but the co-heads of the JP Morgan managed to discover the key reasons for them to be cautious. The idea was concentrated on the purchase of credit default swaps for the purpose of hedging AAA CDO paper holding by JP Morgan; at the end of 2006 the bank started the operations of holdings slash of subprime debt. It is necessary to underline the fact that it managed to sell about $12 billion. The head of JP Morgan saw prosperity in business growth cooperating with Wall Street. Nevertheless, the play for benefits increase and ineffective deals resulted in possible collapse and complete destruction of the banking system. (Tett, 2009)
Enron and Bear Stearns: Moderate Road leading to Crisis
Enron Corporation, founded in 1985, was considered to be the pioneer in energy market; its position on the international arena was beyond competition with the leading business and powerful energy-asset construction. It was perceived as the most innovative world company with the investments of more than $60 billion. Nevertheless incorrect actions of its executive shattered the company’s reputation and resulted in its collapse.
The analysis of the Enron crisis is to be concentrated on the introduction of Milgram experiment, which meant the usage of social psychological factors in the working process. It was concentrated on the fact that employees had to strictly obey the top executors and manages instructing people perform the work which contradicted their personal conscience and conflicted with their individual understanding of the principles of work. Complete obedience to the authority of the company was fulfilled through the destruction of one’s own principles. Enron Corporation used this methodic in order to get perfect business results and profound subordination. People of the company were completely aware of their lies and criminal actions; nevertheless they obeyed as it was the requirement of authorities. Both methods were used to maximize corporate profits whatever the cost. The movie focused on the well known Milgram experiment of 1963 in order to show how psyche state of people influence the quality of work and what grade of obedience the authority could reach through such aspect.
Besides, illegal and risky operations were conducted not only in HR management, but in financial operations; the process of electricity transference from California in order to supply it to numerous states with surplus. After the adoption of California legislation Enron managed to cause blackouts through the whole state. As a result the electricity price was rapidly increased and Enron happened to earn billions of dollars for shipping the energy back to California. The company profit raised and even sky-rocketed immediately. Constant blackouts allowed Enron to reach enormous financial stability inside the company. The result of its operations made the company be bankrupt and bear responsibility for all the actions in accordance with the state system of justice. (Healy, and Palepu, 2009).
Business destruction because of inappropriate operations within Enron and crisis of JP Morgan can be compared to the fall of Bear Stearns, being referred to one of the most powerful financial trading company. It is necessary to stress that the company managed to get the reputation of New York maverick in white-shoe culture, having the dominant position in trading. The beginning of the crisis was connected with inherent limitations within CDO market; despite this fact the investors strived to take additional risk by seeking higher returns. The attempts of making artificial market growth resulted in less creditworthy homebuyers and higher-risk mortgages. High profitability and strengthening of company’s position in 2007 appeared to be the calm before the storm for the banking system. Growing financial instability was caused by financial illegal operations of the executives, leading to the fire sale of all its assets. Bear executives are considered to be the only guilty in the collapse of the huge corporation. The reason for the destruction lied in the investors having no believes in the possibility of loan repay; the interconnection between Wall Street and Bear appeared to be the reason for its fail. The Federal Reserve agreed to fund about $30 billion of assets belonging to Bear Stearns, relying on the taxpayers. In accordance with chief economist Steve East, ‘…as far as Wall street securities houses go, Bear Stearns wasn’t too big to fail’ (Stowell, 2008) Close interconnection made through executives’ operations resulted in the financial destruction.
Commentary
The analysis of financial crisis suffered by three huge corporations JP Morgan, Enron and Bear Stearns, disclosed the grave mistakes of their leaders, who developed moderate road leading to collapse. JP Morgan, unlike Enron and Bear Stearns, is still strong financial leader on the international arena. It crisis was overcome through immediate rehabilitation strategic plan developed by its executives.
The road to companies collapse was built through irresponsibility of the leaders; it is necessary to stress that for Bear Stearns – housing bubble, and for Enron – risky and illegal operations on energy import, appeared to be the background for financial instability. The methods used by the companies’ authority appeared to be destructive, though they brought high profits. Current economical crisis can be perceived through Enron and Bear Stearns financial instabilities and their causes. Nowadays profound analysis of financial markets makes to look at the system of the two analyzed companies; their collapse analysis comparing to JP Morgan current position discloses the extreme need in the financial system reform.
References
Healy, P. and Palepu, K. (2009). The Fall of Enron. Harvard Business School.
JP Morgan’s London head slams ‘greed’ of bankers. (2009). Web.
Stowell, D. (2008). Investment Banking in 2008: Rise and Fall of the Bear. Kellog School of Management.
Tett, G. (2009). Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe. Free Press.