Market perception of liquidity is certainly more important for an investment bank than it is for a traditional manufacturing or distribution business. Considering the given information, it can be said that very small portion of the assets of Bear Stearns was invested in the subprime mortgage market. The situation was similar at the time of collapse. It has been mentioned that the fearing the liquidity issues the share price of Bear Stearns kept falling which was ultimately valued at $2. The prices fell with the fear whether Bears will be able to pay back the value.
The above discussion clearly highlights that the market perception of liquidity is much important for investment bank in comparison to the manufacturing or distribution business. The investment banks do not raise money from retail deposits made into the bank. Rather sources of funding for investment banks are long term debts, interbank markets and the equity. As mentioned earlier, Bear Stearns had very small amount of assets that were invested. The interbank markets funding is usually short term. This leaves long term debt as the primary source of funding (Doyle, 2009a). However, this is not more of long term debt as most of the debts involve repayment. Thus the liquidity should be high so as to meet the needs of the long term debts also to ensure that the sufficient cushion is there for reinvestment and taking suitable decisions that favor the stakeholders’ interest in the company. Further, there is huge mismatch between the assets held by the company and the debt employed. This mismatch calls for liquidity of the firms.
On the other hand, in case of manufacturing and distribution business, the funding is done by equity and long term debts that have consistent and uniform cash flows associated with them. In such cases as long as the business operations generate cash there is not issue. While in case of investment business everything is linked to liquidity of banks as the products of the banks i.e. operations involve financing. It is understood in the manufacturing business that the operations will generate cash rather than involving cash.