STRATEGY AS PROCESS: MINTZBERG & WATERS
Case Company: JP Morgan Chase & Co.
Introduction:
The purpose of this study is to apply and integrate the theories of Mintzberg and Waters on a company / situation which I have chosen as JP Morgan Chase & Co (JPMC) for the period of financial crisis in 2007-08.
Background:
Below case study shows the situation before, during and after the crisis, that’s how was the firm performing before the crisis, the impact of the crisis and the strategies applied to overcome.
Company Overview:
JPMC was founded in New York 1799. It’s one of the world’s oldest, largest and best-known financial institutions. As a global financial services firm with operations in more than 50 countries, JPMC combines two of the world’s premier financial brands: J.P. Morgan and Chase. The firm is a leader in investment banking; financial services for consumers, small business and commercial banking; financial transaction processing; asset management; and private equity.
Many well-known heritage banks include J.P. Morgan & Co., The Chase Manhattan Bank, Bank One, Manufacturers Hanover Trust Co., Chemical Bank, The First National Bank of Chicago and National Bank of Detroit, each closely tied in its time to innovations in finance and the growth of the United States and global economies.
About 2007-08 Crisis
The Global Recession was the general economic decline observed in world markets around the end of the first decade of the 21st century. According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the U.S. recession began in December 2007 and ended in June 2009, and thus extended over 19 months. The Great Recession was related to the U.S. financial crisis of 2007’08 and subprime mortgage crisis of 2007’09.
All the major financial institution got a big hit and a few of them failed to survive. While JP Morgan acquired few banks in that period like Bear Stearns & Co. The fifth largest investment bank in the United States, and also JPMC bought most of the banking operations of Washington Mutual.
Before 2008 Crisis
The economy was in a great boom and was at its maximum. Banks were in very good conditions, they started lending the money for mortgage, etc. Interest rates were cut down. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (The goal was the return to a balance between the benefits of a state bank charter versus a federal bank charter.) and GLBA 1999, commercial banks became free to expand first across state lines and then across service lines. But every rise has a downfall too, and that was the year 2007-08, when this global financial crisis started. The comparison of change in assets and liabilities of JPM, before and after the crisis is added below in the section During Crisis – Key Mergers That Shaped JPMC.
During Crisis – Key Mergers That Shaped JPMC
In 2008, JPMC acquired The Bear Stearns Companies Inc., strengthening its capabilities across a broad range of businesses, including prime brokerage, cash clearing and energy trading globally.
To ensure that financial markets continued to operate as the financial crisis unfolded in 2008, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Department of the Treasury facilitated a number of major transactions among the largest financial institutions. Providing some combination of financial support and regulatory persuasion, the federal government stewarded JPMC’s acquisition of Bear Stearns Companies Inc and Washington Mutual.
Before the acquisition, JPMC had just under $1.6 trillion in assets at year end- 2007. Bear Stearns assets, based on their SEC filings were $399 billion in the first quarter of 2008, but this figure had fallen to $289 billion by May of 2008 ‘ at the time the merger became effective ‘ as their assets were written down and disposed of. Washington Mutual reported assets of $264 billion at the time of its sale, so the two acquisitions collectively added a maximum of $550 billion.
The assets of JP Morgan had increased by $613 billion by the end of 2008, indicating that the company also added a minimum $60 billion of additional assets over the period, reaching a total size of $2.18 trillion.
Comparing the consolidated balance sheet of JP Morgan at the end of 2007, before the mergers, and December 2008, after the mergers, reveals that the largest increases in assets occurred in the following areas:
1. Deposits with banks increased by approximately $126 billion.
2. Loans, net of allowance for losses by about $211 billion.
3. Federal funds repos (Repurchase Agreement) by $32 billion.
4. Borrowed securities by $40 billion
5. Accrued interest and accounts receivable by $36 billion.
6. On the liability side, the largest increases between December 31, 2007 and December 31, 2008 were in deposits, which increased by $269 billion; federal funds and other repos, by $38 billion; other borrowed funds, by $104 billion; accounts payable, by $94 billion; and long term debt, by $68 billion.
7. Stock holder equity rose by $44 billion.
It is hard to give a full interpretation of two complex acquisitions during such a troubled period, but it appears that the acquisition of Bear Stearns provided JP Morgan with value through its investment banking clients and securities business. Washington Mutual provided an expansion of JP Morgan’s deposit base and loan portfolio, and the company was also the beneficiary of a general flight to safety that contributed additional deposits (increases in its liabilities) which were then placed into fairly safe assets.
How was it Deliberate
The JPMorgan’s Chief Investment Office (CIO) office located in London traditionally focused on investing the bank’s excess cash at a corporate-wide level-a relatively low-risk activity. Excess capital was invested in liquid, low-risk bonds and money market instruments.
Emerging– Initiation Strategy When Jamie Dimon Came in
About six years ago, JP Morgan, CEO Jamie Dimon changed the mandate of the CIO function to seek profit. High-risk-taking trader types were hired. Incentive systems were also modified. Those that could generate big profits made big bonuses.
Financial Crisis: How it Happened
Environment of easy credit and the upward spiral of home prices made investments in higher yielding subprime mortgages look like a new rush for gold. Fed also continued slashing interest rates, emboldened, perhaps, by continued low inflation despite lower interest rates. Interest rates were lowered to 1%, the lowest rate in 45 years. The whole financial market started resembling a candy shop where everything was sold at a huge discount and without any down payment. ‘Lick your candy now and pay for it later’ – the entire subprime mortgage market seemed to encourage those with a sweet tooth for have-it-now investments. Unfortunately, no one was there to warn about the tummy aches that would follow.
This caused 2007 to start with bad news from multiple sources. Every month, one subprime lender or another was filing for bankruptcy. During 2007, more than 25 subprime lenders filed for bankruptcy, which was enough to start the tide. In April, well-known New Century Financial also filed for bankruptcy.
Management’s view of the company’s strategy
Two areas where management has placed an emphasis are new products and building out capacity. JP Morgan has launched 59 funds since 2005. Those launches include a target-date series and country funds focused on China, India, and the Latin America region–all relative standards at other fund companies. JP Morgan has been more innovative with 130/30 funds, an inflation-managed bond fund, and an absolute return strategy.
One area where JP Morgan is a clear standout is with its board. Eleven of the 13 trustees are considered independent, and the board is led by an independent chairman, Fergus Reid III. The independent trustees also invest heavily in the funds they monitor.
Conclusion
The situation shows that the strategy of the company had imposed strategy during the period of the financial crisis. As there was no control of JPM over the outside market conditions and on this financial crisis, but they tried to acquire the institutions impacted by this crisis to strengthen their area. They took over these financial institutions and become a big giant among financial institution and now stand as a leading bank in the US.
According to Jamie Demon, JPMC’s strategy will stay essentially the same and that while some areas may require a little surgery, we strongly believe we will be able to successfully navigate the new world. Some of that surgery will slow down our growth a little bit in certain areas, but we are quite optimistic that we can grow in others.
Most of our growth will be organic ‘ we have been doing this successfully for a decade ‘ and opportunities abound.
JP Morgan’s focus on generating returns with limited risk is intentional, and the firm has executed well on that goal. It is a long-held strategy versus reverting to some kind of survival tactic. The fund family has capable talent, a decent line-up that is getting stronger, a tendency to keep fees low, and a clean regulatory history.
References
Baily, M., Bekker, W. and E. Holmes, S. (2015). The big four banks: The evolution of the financial sector, Part I. 1st ed. [ebook] Economic Studies. Available at: http://www.brookings.edu/~/media/research/files/papers/2015/05/26-big-four-banks-asset-share/big-four-final.pdf [Accessed 4 May 2015].
JPMorgan Chase & Co., (2015). Letter to Shareholders from Jamie Dimon, Annual Report 2014 | JPMorgan Chase & Co.. [online] Available at: http://www.jpmorganchase.com/corporate/annual-report/2014/ar-introduction.htm [Accessed 5 Oct. 2015].
JPMorgan Chase & Co., (2015). Solid Strategy and Future Outlook – Annual Report 2014 | JPMorgan Chase & Co.. [online] Available at: http://www.jpmorganchase.com/corporate/annual-report/2014/ar-solid-strategy.htm [Accessed 5 Oct. 2015].
The History of JPMorgan Chase & Co. 200 Years of Leadership in Banking. (2015). 1st ed. [ebook] jpmorganchase. Available at: http://www.jpmorganchase.com/corporate/About-JPMC/…/shorthistory.pdf [Accessed 5 Oct. 2015].
Topics.nytimes.com, (2015). Credit Default Swaps. [online] Available at: http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_default_swaps/index.html?scp=1-spot&sq=credit%20default%20swaps&st=cse [Accessed 5 Oct. 2015].
Singh, M. (2008). The 2007-08 Financial Crisis In Review. [online] Investopedia. Available at: http://www.investopedia.com/articles/economics/09/financial-crisis-review.asp [Accessed 28 Oct. 2008].
ABBREVIATIONS
GLBA – Gramm’Leach’Bliley Act 1999
JPMC – JP Morgan Chase & Co
CIO – Chief Investment Office
CEO – Cheif Executive Officer
FDIC – Federal Deposit Insurance Corporation
Repos: Repurchase Agreement