J.P. Morgan & Co. now Jack Pierpont Morgan and Anthony Drexel, who was a Philadelphian banker, founded the J.P. Morgan Chase in 1871. The new commercial banking partnership initially served as an agent for Europeans investors in the United States (Sowell 15). This helped it to raise much of the capital that ultimately served a significant role in the support of American industrial expansion. The Drexel-Morgan hence established itself quickly as an eminent private domestic foreign bank in the United States. In 1879, the bank made its first major splash when it sold William’s Vanderbilt New York Railroad stock without lowering the share market. J.P. Morgan is currently one of the leading global financial firms with its spreading operations across more than 50 countries. J.P. Morgan’s headquarters are located in the city of New York. The bank under J.P. Morgan serves millions of consumers in not only the United States, but also many other global corporations, institutions, and governments. In the period of the crisis of both 1920s market depression and the global crisis in 2008, Morgan financial assistance was critical to the economical recovery of the U.S. government.
Global Financial Crisis of the 1920s
During the financial crisis of the 1920s, the banking industry had plenty of money to lend; however, large corporations chose not to borrow from the banks, but rather to finance portions of the capital needs in stock and bond markets. This led banks to seek for new lending outlets including individual’s speculations in the stock market. As the stock market rose, the loans produced solid returns, but when the market crashed in 1929, the loans went to default: thousands of banks faced a difficult time from loan losses, depositor withdrawals, and for in adequate reserves J.P. Morgan.
In June 1932, depositors started to withdraw their money from First national bank in Chicago when some individuals started to supply fliers that claimed that the bank was insolvent. Media reports blamed the attacks on Melvin Taylor’s political enemies. Melvin Taylor had been the first National’s bank president, but also was seeking for a Democratic Party’s nominee ticket for the U.S. president. During that period, J.P. Morgan rescued First National Bank from collapsing. Not only did Morgan rescue the National Bank, but also Morgan funded many more major banks that were at the brink of collapsing during the depression. The fact that J.P. Morgan predecessor National Bank Detroit was opened at the very depth of the financial depression period demonstrates the financial muscle that J.P. Morgan was still enjoying even as many major banks were facing remarkable financial challenges.
Global Financial Crisis of 2008
In the spring of 2008, the world was hit by the Global Financial Crisis (GFC), or the second “Great Recession”, which was the worst Financial Crisis since the great recession of 1930. The crisis began in the era of Reagan administration and peaked a couple of decades later with ultimately saw a collapse of the housing bubble. “Bubble” is defined by Behavioral Finance as an event that occurring before market crash because of overvalued market prices
(Ricciardi 20). The housing bubble reflects the culmination of the financial crisis in the United States. The financial crisis crippled many banks, and the two of the worlds’ largest mortgage investors were also crippled by those events. This put the U.S. government into more debt and a financial meltdown ensued ion the country. Nearly ten years after the LTCM failed, the financial crisis came to reality. Bear Sterns is the first of the many banks that was affected by the financial crisis after the collapse of the housing bubble. Concerns that it would collapse led resulted in its fire sale of its share to J.P. Morgan chase it in March, 2008.
The merge occurred after both Bernanke and the FED failed to bail out Bear Sterns, leading to the merge where Bear Stearns sold its shares to J.P. Morgan for $2 a share (CNBC 2008). This is the first intervention by J.P. Morgan than “saved” the U.S. government. This is because collapse rumors that Goldman Sax would desert Bear Sterns had started to send chills in the spines of many investors. The collapse of this major bank would have had a negative impact in the confidence of investors among the financial institutions in the country. This would actually have affected the country negatively. Not only did J.P. Morgan rescue Bear Sterns, but also agreed to receive the huge grants that the country was lending to the banks to avoid collapse.
A second crisis occurred when Sallie Mac and Freddie Mae (the two largest mortgage investors in the world) went underneath followed by the fall of Lehman Brothers. The companies, initially affected, were those directly involved in mortgage lending and home construction such as Countrywide Financial and Northern Rock. This is because it became extremely difficult for them to obtain financial support through the credit markets. Over 100 mortgage lenders had become insolvent during 2007 and 2008 (Sowell 15).
During this period, J.P. Morgan was actively engaged in financing supply chain projects, which had a major contribution and support to the U.S. economy during the crisis. The supply chain finance initiative became a critical tool for optimizing working capital for many corporations. They proved a much-needed asset for suppliers and buyers who had been frozen out of their credit markets. Many of the buyers readily deployed the supply chain finance to maximize cash that they needed for working capital, as well as for funds investments to enhance their business growth.
During this period of financial crisis, nearly every company in a multi-dimensional industries struggled with their liquidity and financial costs. They sought ways to reduce the need for their working capital leading to a common insight where the company’s supply chain finance would become more than the logistical financial tool. Many financial institutions at this time tried their procurement activities to be better with their financial strategy in an attempt to hold as much of their cash as possible. However, many companies and corporations continued to exhibit lower gains until J.P. Morgan introduced a form of financing hereby referred as the supply chain finance. This form of financing had a critical role in facilitating financial recovery not only for the U.S. economy, but also in a global recovery context. This paper looks at J.P. Morgan financial assistance and its role in “saving” the U.S. government during times of crisis.
During this period, many corporate strategically applied for this form of financing to reinforce their working capital strategies (Sowell 10). Even in this period of post-crisis, when the capital markets are developing solutions to add to other proposition of sustaining the recovery, many financial corporations and partnerships have continued to focus on J.P. Morgan global offering to offer financial solutions for corporate clients in America.
In order to understand how the innovative supply chain finance worked, this paper uses the case study of Caterpillar Company as a stakeholder in this approach. During the period of the economic crisis, the equipment and machinery company suffered many challenges in finding suppliers because many of them would struggle to finance the ramped-production due to the crisis. Caterpillar opted not to use its cash to finance the suppliers, but chose J.P. Morgan to help them in balancing between the supplier liquidity and their working capital management.
J.P. Morgan responded by introducing the supply finance program which not only offered financial funding, but also a management program that ensured supplier enrollment. Hundreds of Caterpillar’s suppliers thereby standardizing payment terms that were consistent and utilized electronic payment methods deployed the J.P. Morgan solution (Grosse 8). Caterpillar would use one platform to electronically present invoices to their suppliers who had the choice of taking early payments at a discount. J.P. Morgan would fund the early payment. The solution was also attractive for the suppliers who would then offset the payment’s terms standardization costs from their financial bases.
The J.P. program proved to be an effective working capital tool for Caterpillar because of the levels that were in excess of their original goals. By implementing, the electronic based invoicing and payment standardization programs across its supply base, Caterpillar came to a position where they would speed up the payments across multiple divisions and the payments processing were also streamlined. Such is how hundreds of companies thereby facilitating their economic recovery deployed J.P. Morgan program. This had a positive impact in the economical recovery of the country.
The financial institution crisis reached its peak in October 2008. Several major institutions collapsed, or were acquired because of the pressure the crisis had. J.P. Morgan is one of the bank’s that remained strong and took over some of the failing banks such as Bears Stearns, thereby rescuing them from collapse. Other corporations and financial institutions, that either collapsed or were taken over by the government, include Lehman Brothers, Fannie Mae, Merrill Lynch, Freddie Mac, Wachovia, Washington Mutual, Citigroup, and AIG just to mention a few (Ricciardi 16)
The financing supply chain initiated by J.P. Morgan has resulted to a rebound in trade levels to unanticipated high levels. In 2010, for example, an amazing 14.5 percent growth rate was recorded in global trade, which reflects a global financial recovery. This is also true in the United States which is experiencing a financial recovery with the remarkable contribution of J.P. Morgan towards this cause being something that the government should reckon with.
Betts A. Sustaining Global Growth: Post-Crisis Trends in Supply Chain Finance. New York. M. Sharpe
CNBC. J.P. Morgan Agrees to Buy Bear Stearns for $2 a Share.” CNBC News Headlines, N.P., 17 Mar. 2008.
Grosse, Robert E., The Global Financial Crisis – A Behavioral View (January 16, 2010). Available at SSRN: http://ssrn.com/abstract=1537744 or http://dx.doi.org/10.2139/ssrn.1537744
Morgan. J.P. Morgan Treasury Services Retrieved on 14th may 2013 from jpmorgan.com
Ricciardi, Victor and Simon, Helen K., What is Behavioral Finance?. Business, Education & Technology Journal, Vol. 2, No. 2, pp. 1-9, Fall 2000. Available at SSRN: http://ssrn.com/abstract=256754
Sowell, T. The Housing Boom and Bust, New York, Basic Books publishers. 2010