Bear Stearns Executive Summary
The accounting issues surrounding mortgage backed securities and the collapse of Bear Stearns
Table of Contents
Executive Summary 3
Bear Stearns and their Activities Prior to its Collapse 4
Mortgage Backed Securities (MBS) and Collateralized Debt Obligations (CDO) 5
Accounting Theory, Mortgage Backed Securities, and the Collapse of Bear Stearns 6
The Offsetting Nature of Relevance and Reliability 7
Fair Value Accounting 9
Information Asymmetry 11
Adverse Selection 11
Moral Hazard 12
Market Efficiency versus Behavioral Finance 13
The Use of Complexity to Hide Risk 14
Disclosure to Shareholders 15
Corporate Governance 16
Executive Compensation 17
Conclusion 18
Appendix 20
References 23
Executive Summary
Bear …show more content…
The EMH factors that investors are all gifted with similar intelligence and that the message the financial statements are trying to convey are all comprehended fairly and equally by all investor. The reality is that individuals may have limited attention where they may not have the time to process all available information, and might concentrate on only certain elements of the information, such as the bottom line. On the other hand, individuals may be conservative, and not react fast enough to the information.
The behavioural theory also suggests that most investors are often overconfident, and overestimate the precision of the information they collected themselves. The theory goes on to say that individuals assign too much weight to evidence that is consistent with the individual’s impressions of the population.
The theory also implies that other individuals carry self-attribution bias, whereby individuals feel that good decision outcomes are due to their abilities, and bad outcomes are due to unfortunate realizations f states of nature, hence, not their fault. This theory states that if enough investors behave this way, that momentum can …show more content…
With interest rates at historical lows, investors were happy to borrow and invest while expecting to make profits. In the case of CDOs however, the credit rating agencies were giving the CDOs the best rating possible, and traders only had that information to rely on. The financial engineers that built these CDOS are the ones to blame for the collapse, and they are not directly affected by the EMH, where their jobs do not interact immediately to the market information
Table of Contents
Executive Summary 3
Bear Stearns and their Activities Prior to its Collapse 4
Mortgage Backed Securities (MBS) and Collateralized Debt Obligations (CDO) 5
Accounting Theory, Mortgage Backed Securities, and the Collapse of Bear Stearns 6
The Offsetting Nature of Relevance and Reliability 7
Fair Value Accounting 9
Information Asymmetry 11
Adverse Selection 11
Moral Hazard 12
Market Efficiency versus Behavioral Finance 13
The Use of Complexity to Hide Risk 14
Disclosure to Shareholders 15
Corporate Governance 16
Executive Compensation 17
Conclusion 18
Appendix 20
References 23
Executive Summary
Bear …show more content…
The EMH factors that investors are all gifted with similar intelligence and that the message the financial statements are trying to convey are all comprehended fairly and equally by all investor. The reality is that individuals may have limited attention where they may not have the time to process all available information, and might concentrate on only certain elements of the information, such as the bottom line. On the other hand, individuals may be conservative, and not react fast enough to the information.
The behavioural theory also suggests that most investors are often overconfident, and overestimate the precision of the information they collected themselves. The theory goes on to say that individuals assign too much weight to evidence that is consistent with the individual’s impressions of the population.
The theory also implies that other individuals carry self-attribution bias, whereby individuals feel that good decision outcomes are due to their abilities, and bad outcomes are due to unfortunate realizations f states of nature, hence, not their fault. This theory states that if enough investors behave this way, that momentum can …show more content…
With interest rates at historical lows, investors were happy to borrow and invest while expecting to make profits. In the case of CDOs however, the credit rating agencies were giving the CDOs the best rating possible, and traders only had that information to rely on. The financial engineers that built these CDOS are the ones to blame for the collapse, and they are not directly affected by the EMH, where their jobs do not interact immediately to the market information