12

Question 1

default

Answer 1

debtor is unable to meet the legal obligations of the debt repayment

Question 2

securitize

Answer 2

process of taking an illiquid asset and transforming it into a security

Question 3

mortgage backed securities

Answer 3

bundles of thousands of mortgages from which shares are sold to investors

Question 4

subprime mortgage

Answer 4

loan granted to individuals with poor credit histories

Question 5

collateralized debt obligation

Answer 5

bundle of lower rated tranches of a mortgage bond

considered “diversified”

Question 6

credit default swap

Answer 6

insurance against the default of a mortgage backed security

Question 7

gov’t response to recession

Answer 7

emergency loans to banks - prevent fundamentally sound banks from collapsing

scrutinization of bank balance sheets to determine sound banks and those in need of more money

Jan 2009 stimulus package (800 bil) into the economy (through spending/tax cuts) to help slow free fall of spending/output/unemployment

Question 8

dodd-frank law

Answer 8

financial reform law

takes steps to increase transparency/prevent banks from taking so much risk

set up consumer protection bureau to reduce predatory lending

required financial derivatives to be traded in exchanges that all participants can observe

put mechanisms in place for banks to fail in a controlled/predictable manner

Question 9

moral hazard

Answer 9

one person takes on more risk because someone else bears the burden of that risk