Case discussion/CFA Standarts Flashcards
CFA Standards of Practice.
What are CFA standards of practice?
Rigorous ethical guidelines specific to the finance industry.
Goes beyond ethics, in pointing out good professional practice
CFA Standards of Practice.
Name three main components of CFA practices?
PROFESIONALISM
INTEGRITY OF FINANACIAL MARKETS
DUTIES
CFA Standards of Practice.
Name PROFESIONALISM components and explain them.
*Knowledge and appliance with the law
- (Know the laws/rules and comply with them; When operating in multiple jurisdictions, adhere to the stricter law)
- (Do not knowingly assist/associate with violations)
*Independence and objectivity
- (no gift/benefits/compensation acceptance that could compromise objectivity)
*Honesty in both representation and conduct
- (Must not knowingly misrepresent analysis/ performance/ qualifications/ abilities)
CFA Standards of Practice.
Name INTEGRITY OF FINANCIAL MARKET components and explain them.
*Insider trading
*Market manipulation
(I would say self explanatory )
CFA Standards of Practice.
Name DUTIE components and explain them.
*Loyalty
-(Loyalty to both clients and employer, putting the client’s interests before those of employer and employer’s before those of self; Fiduciary duty = act solely in the interests of the beneficiary)
*Disclosure of conflict of interest to client/employer
-(Conflict of interest = when a personal or institutional interest interferes with the ability of an individual or institution to act in the best interests of another party)
*Fair and objective dealing with clients
-Equal treatment (no favouritism)
*Accurate and complete performance presentation
*Presentation of client confidentiality
Case discussion: BEAR STEARNS
In what ways was the funding situation for Bear different from the rest of the industry?
*Bear did not have access to Federal Reserve’s short-term financing (discount window), thus it was highly dependent on the market for funding and liquidity. Reliance on short-term funding: Bear Stearns relied heavily on short-term funding, which made it vulnerable to liquidity shocks.
*Lack of diversification: Bear Stearns had a heavy focus on mortgage-backed securities (MBS) and related products, which accounted for a significant portion of its revenue. This lack of diversification left the firm exposed to the housing market downturn
*High leverage: Bear Stearns had a high level of leverage, meaning that it had a large amount of debt relative to its equity.
Case discussion: BEAR STEARNS
In what ways was the funding situation for JPMC different?
*Fortress balance sheet (STRONG) - but only compared to other investment banks
*Lower risk management: JPMC had a more effective risk management framework than Bear Stearns, including a sophisticated risk management system and a strong culture of risk management.
*Diversified business model: JPMC had a more diversified business model than Bear Stearns, with a broader range of business lines, including commercial banking, investment banking, and asset management. This diversified business model allowed JPMC to generate revenue from multiple sources, reducing its reliance on any one area of the business.
Case discussion: BEAR STEARNS
Explain Fortress Balance sheet
Four key components:
*large amounts of cash capital,
*term financing (to match assets with liabilities),
*stress testing to understand where unlikely but very large losses could appear,
*liquidity reserves for assets that became illiquid.
+Use of conservative accounting within rules
Case discussion: BEAR STEARNS
What does it mean that ”Bear was too interconnected to fail”?
Firms operate and trade with each other. Reliant on one another in variety of ways →Options issued, overnight repo, overall economic situation, missing hedges
Firm 1 deals with firm 2→Firm 1 fails, leaving firm 2 to scramble to cover their positions → Pushing prices down and affecting the whole market
Case discussion: BEAR STEARNS
What were the arguments FOR saving Bear?
*Risks of spillover effects: there was a great probability of widespread insolvencies, severe and protracted damage to the financial system and, ultimately, to the economy as a whole and economic activity. The failure of Bear Stearns could have caused a loss of confidence in the financial system and the US economy, both domestically and internationally.
*Major employer in the financial sector, and its failure would have resulted in significant job losses.
*Bear Stearns had significant exposure to international markets, and its collapse could have had a domino effect on other economies around the world.
*First case
Case discussion: BEAR STEARNS
What were the arguments AGAINST saving Bear?
*Moral Hazard precedent: if the government would have saved Bear Stearns, then other investment banks would be encouraged to engage in risky profit-maximising strategies that could destroy the economic prosperity, as they would expect the bail out.
*Relatively large economic cost
*Regular workers were protesting against saving these firms with risky business practices. Bad PR for Bear, the Government and JPMC.
*Bear could have attempted to fix the underlying issues, but chose not to do anything
