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This Note provides an overview of the structure and function of the Banking industry, with a primary focus on the U.S. It was designed to support the HBS MBA course "Managing the Financial Firm."

The (C) case describes the results of Credit Suisse's PIP I program, the value of PAF, shareholders' vote on the new compensation plan supported by management, and the impact of the company's approach to the U.K. banker tax.

The (B) case describes how Credit Suisse management allocated the cost of the 25% U.K. banker's tax among shareholders, U.K. Managing Directors and the other employees globally.

On October 20, 2009 Brady Dougan, the CEO of Credit Suisse Group, announced a new compensation plan for the bank. The announcement had followed quickly on the heels of the G-20 meeting the prior month where, in the wake of the financial crisis, the major governments had laid out a set of guidelines for compensation in the financial industry. Credit Suisse Group was the first firm to adopt the G-20 guidelines, and did so a year ahead of the suggested timetable. While responsive to the concerns of regulators and politicians, Credit Suisse's program was more than a knee-jerk reaction, the new compensation plan had been the result of a "10 year journey" to reshape the culture of the firm. After a significant investment of senior leadership time to explain the new program to employees a significant new challenge arose. On December 9, the U.K. government announced they would impose a one-time 50% tax on bankers' bonuses greater than 25,000 pounds. Dougan and the executive team had to decide how best to fund this tax. Was it fair or appropriate to have the shareholders shoulder the burden of the tax? Similarly, was it fair to ask the UK employees to suffer relative to their peers in other countries?

In 2010, Friend Bank was entering the fifth year of Hope Harris Johnson's ambitious 20-year growth plan to transform her family's one branch community bank into an institution with a substantial presence in southeastern Alabama. Harris Johnson was pleased, so far, with the results. Strategically they had exceeded expectations in opening a second office and execution of the plan was going well. And while the financial and economic crisis that began in 2008 had affected the financial results, it also presented Friend with competitive opportunities. Nonetheless, realizing her ultimate goals for Friend would not come easily.

ITG CEO Robert Gasser wondered if the financial crisis had permanently affected the firm's business model. A leader in trade analytics and execution for institutional equity investors, ITG had grown since its establishment in 1987 in step with the dramatic rise in equity trading volumes. During 2009, however, investors curbed their equities trading, depressing ITG's heavily commission-based revenues, and earnings plunged by 63%, resulting in ITG's first unprofitable quarter since 1988. Gasser was convinced that ITG's challenges were not simply a function of shrinking trading volumes; 2009's downturn revealed limits of client willingness to pay for the value ITG delivered, and the infrastructure ITG had constructed to support clients with customized software tools and technical support had grown well beyond sustainable levels. With his management team, Gasser had developed a two part response to the challenge: a reduction in staff and a focus on clients that most valued what ITG offered. While significant cost savings goals would be realized in part through employee layoffs, he wondered about ITG's ability to deal with these changes. Adjusting its customer portfolio meant that ITG would be pulling back products from some clients while reaching out to others in new ways, and he was unsure how clients would respond.

Aubrey McClendon, founder and CEO of Chesapeake Energy, was, according to Fortune Magazine, the highest paid U.S. CEO in 2008 receiving over $100 million in total compensation. McClendon received this compensation despite a significant drop in the company's stock price and financial performance during the year. The (A) case addresses the specifics of the compensation and the rationale for the compensation from the perspective of Chesapeake's board and its compensation committee including McClendon's role in consummating several joint ventures, which the board and committee believed positioned the company for future growth in the relatively young industry of unconventional natural gas exploration and extraction. In addition, the (A) case describes the role of the compensation committee and the company's executive performance measurement factors.

[Continuation of "A" and "B" cases.] Less than a month after the close of the merger between The Bank of New York and Mellon Financial, managers at the two firms realized that plans for combining their asset servicing businesses - and realizing the $180 million of annual cost savings that they had promised Wall Street - were fraught with risk. Senior executives must evaluate the seriousness of the risks and identify alternative ways of integrating the two firms, while safeguarding the technologies that process and clear a substantial fraction of the world's financial transactions.

[Continuation of "A" case.] Less than a month after the close of the merger between The Bank of New York and Mellon Financial, managers at the two firms realized that plans for combining their asset servicing businesses - and realizing the $180 million of annual cost savings that they had promised Wall Street - were fraught with risk. Senior executives must evaluate the seriousness of the risks and identify alternative ways of integrating the two firms, while safeguarding the technologies that process and clear a substantial fraction of the world's financial transactions. [Continues with "C" case.]

Less than a month after the close of the merger between The Bank of New York and Mellon Financial, managers at the two firms realized that plans for combining their asset servicing businesses - and realizing the $180 million of annual cost savings that they had promised Wall Street - were fraught with risk. Senior executives must evaluate the seriousness of the risks and identify alternative ways of integrating the two firms, while safeguarding the technologies that process and clear a substantial fraction of the world's financial transactions. [Continues with "B" and "C" cases.]

In 1998, the Travelers Group and Citicorp merged to create Citigroup Inc., considered the first true global "financial supermarket," and a business model to be envied, feared and emulated. By year-end 2006 the firm had a market capitalization of $274 billion, with $1.9 trillion in assets and $24.6 billion in earnings. But ten years after the merger it ended in tears. In July of 2009, the firm was effectively nationalized, with billions of dollars in bailout money converted into a 34% ownership stake for the U.S. government. Citigroup was worth less than $16 billion, having lost more than $250 billion in value from its peak. This case examines Citi's business model, challenges it faced, its leadership and key decisions to better understand what contributed to the failure of one of the most powerful financial firms in the world.

This note was created to supplement classroom discussion in the EC course "Managing the Financial Firm" and provides background for exploring issues general managers in financial firms face in considering appropriate capital levels.

On September 23, 2008, in the midst of an historic crisis in the U.S. financial markets, Warren Buffet's Berkshire Hathaway invested $5 billion in Goldman Sachs. Goldman CEO, Lloyd Blankfein, said: "We are pleased that given our longstanding relationship, Warren Buffett, arguably the world's most admired and successful investor, has decided to make such a significant investment in Goldman Sachs." He added that the deal "will further bolster our strong capitalization and liquidity position," calling Buffett's decision "a strong validation of our client franchise and future prospects." For his part, Buffett called Goldman "an exceptional institution" with "...an unrivaled global franchise, a proven and deep management team, and the intellectual and financial capital to continue its track record of outperformance." This case provides an opportunity to evaluate Goldman's decision to raise capital, the cost of the firm of Buffett's investment, and the decision by Warren Buffett to make the investment, all in the context of a profound market crisis that may have altered the usual metrics for such decisions.

This case examines Lehman Brothers in the months preceding its collapse. Following the announcement of a huge and unexpected second quarter loss, the CFO was removed from her post after only seven months in the job. This case explores the challenges faced by a firm leader as she attempts to manage a situation that threatens the firm's survival. In particular, the case allows for an examination of how changes in a firm's performance and position are communicated to key external stakeholders in an effort to retain their confidence, while market conditions worsen, the balance sheet deteriorates, and the firm's credibility is challenged by a short selling hedge fund.

Bear Stearns & Co burned through nearly all of its $18 billion in cash reserves during the week of March 10, 2008, and an unprecedented provision of liquidity support from the Federal Reserve on Friday March 13 was insufficient to reverse the decline in Bear's condition. Federal Reserve Chairman Benjamin Bernanke, Treasury Secretary Henry Paulson and New York Fed President Timothy Geithner were intent on limiting the impact of Bear's problems on the wider financial system. James "Jamie" Dimon, Morgan's Chairman and CEO, was in frequent contact with these regulators over the weekend of March 14-16, negotiating possible scenarios for the rescue of Bear, without which would force it to seek bankruptcy protection when markets opened on Monday. Late on Sunday afternoon, March 16, Bear's board accepted Morgan's offer to purchase Bear for $2 per share, an offer that would not have been made without significant government assistance. There was hope that the Bear rescue would help avert the far-reaching spread of damage into the larger financial world that many policymakers viewed as likely to follow the failure of a major investment bank. This case examines a seminal event in the financial and economic crisis that began in the summer of 2007, and provides background for better understanding the full scope of the crisis as it was revealed during the summer and fall of 2008. It was written to address two sets of issues. First, it provides the opportunity to understand the corporate finance issues of capital and liquidity, and of firm valuation. Second, the case allows for the exploration of aspects of a firm's internal and external governance, as well as the challenges of navigating through a crisis when faced with compelling pressures from competing stakeholders.

Bear Stearns & Co burned through nearly all of its $18 billion in cash reserves during the week of March 10, 2008, and an unprecedented provision of liquidity support from the Federal Reserve on Friday March 13 was insufficient to reverse the decline in Bear's condition. Federal Reserve Chairman Benjamin Bernanke, Treasury Secretary Henry Paulson and New York Fed President Timothy Geithner were intent on limiting the impact of Bear's problems on the wider financial system. James "Jamie" Dimon, Morgan's Chairman and CEO, was in frequent contact with these regulators over the weekend of March 14-16, negotiating possible scenarios for the rescue of Bear, without which would force it to seek bankruptcy protection when markets opened on Monday. Late on Sunday afternoon, March 16, Bear's board accepted Morgan's offer to purchase Bear for $2 per share, an offer that would not have been made without significant government assistance. There was hope that the Bear rescue would help avert the far-reaching spread of damage into the larger financial world that many policymakers viewed as likely to follow the failure of a major investment bank. This case examines a seminal event in the financial and economic crisis that began in the summer of 2007, and provides background for better understanding the full scope of the crisis as it was revealed during the summer and fall of 2008. It was written to address two sets of issues. First, it provides the opportunity to understand the corporate finance issues of capital and liquidity, and of firm valuation. Second, the case allows for the exploration of aspects of a firm's internal and external governance, as well as the challenges of navigating through a crisis when faced with compelling pressures from competing stakeholders.

Bear Stearns & Co. burned through nearly all of its $18 billion in cash reserves during the week of March 10, 2008, and an unprecedented provision of liquidity support from the Federal Reserve on Friday March 13 was insufficient to reverse the decline in Bear's condition. Federal Reserve Chairman Benjamin Bernanke, Treasury Secretary Henry Paulson and New York Fed President Timothy Geithner were intent on limiting the impact of Bear's problems on the wider financial system. James "Jamie" Dimon, Morgan's Chairman and CEO, was in frequent contact with these regulators over the weekend of March 14-16, negotiating possible scenarios for the rescue of Bear, without which Bear would be forced it to seek bankruptcy protection when markets opened on Monday. Late on Sunday afternoon, March 16, Bear's board accepted Morgan's offer to purchase Bear for $2 per share, an offer that would not have been made without significant government assistance. There was hope that the Bear rescue would help avert the far-reaching spread of damage into the larger financial world that many policymakers viewed as likely to follow the failure of a major investment bank. This case examines a seminal event in the financial and economic crisis that began in the summer of 2007, and provides background for better understanding the full scope of the crisis as it was revealed during the summer and fall of 2008. It was written to address two sets of issues. First, it provides the opportunity to understand the corporate finance issues of capital and liquidity, and of firm valuation. Second, the case allows for the exploration of aspects of a firm's internal and external governance, as well as the challenges of navigating through a crisis when faced with compelling pressures from competing stakeholders.

Spreadsheet Supplement for case 309001

Supplements the (A) case.

Supplements the (A) case.