CH 5 causes of GR

Question 1

What were the safeguards on commercial banks during the GR?

Answer 1

• Limiting the amount of leverage
• the FED funded sources in bad times
• FDIC insurance: guaranteed deposits

Question 2

What were the safeguards on investment banks during the GR?

Answer 2

• No leverage limits
• No access to FED borrowing
• No FDIC insurance (don’t take deposits)
  - commercial paper, repurchase agreements

Question 3

What is commercial paper? and some facts

Answer 3

• short term unsecured loan (no collateral) less than 270 days
• Lower transaction cost (not SEC registration)
• Only issued to “high quality” firms

Question 4

What is a repurchase agreements and some facts

Answer 4

• Deal to buy an asset, to be sold back in specified time frame (very short) for more money
• The difference between the purchase and the repurchase prices is the profit made
• Borrowed period is often only overnight

Question 5

Money Market Mutual Funds (MMMF) switched from what to what?

Answer 5

• It switched from treasuries to commercial paper (safer to risky)

Question 6

What is the MMMF held by?

Answer 6

• pensions, retirement plans, insurance firms

Question 7

Mortgage backed securities (MBS) could issues what and accept what?

Answer 7

• they could issue commercial paper: considered high quality firms
• Acceptable collateral for repurchase agreements

Question 8

What are shadow banks?

Answer 8

• Investment banking businesses

Question 9

How do shadow banks get their money?

Answer 9

• Through investors

Question 10

What was the situation during the GR?

Answer 10

• Mortgage backed securities and Collateralized debt obligations fell in value

Question 11

Who worked together during the crisis?

Answer 11

• The treasury and the FED

Question 12

What are some differences between the Treasury and the FED?

Answer 12

• The treasury is political
• They regulate taxes and budgeting
• The FED tends to be independent
• regulates Monetary Policy
  Money Supply: impacts Short term interest rates

Question 13

What were some actions that the FED took during the GR?

Answer 13

• FED aggressively lowered interest rates
• Nationalized Fannie Mae and Freddie Mac
• Orchestrated Bear Stearns buyout by JP Morgan

Question 14

What was another action taken by the FED during the GR?

Answer 14

• the FED gave $85 bill to AIG, an insurance firm.

Question 15

what is Credit default swaps?

Answer 15

• Contracts that pay holders if debt securities default

Question 16

What was the Gov’s collateral after lending $85 bill?

Answer 16

• The gov took 80% of firms ownership

Question 17

Which firm was the one that failed during the crisis and what were some consequences?

Answer 17

• Lehman Brother’s
• Investors panicked
• Stock Market Plummets

Question 18

What were the intentions when congress created the FED

Answer 18

• Assist commercial banks; no private business

- Assist with liquidity problems; not bankruptcy

Question 19

What is “Breaking the buck”?

Answer 19

• The net asset value of MMMF share drops below $1 per share

Question 20

In 2008, what did congress pass during the GR?

Answer 20

• TARP= Troubles asset relief program

Question 21

What did TARP authorized?

Answer 21

• It authorized up to $700 bill to buy mortgages and MBS from financial and non-financial firms

Question 22

What does TARP moeny buys?

Answer 22

• Preferred Stock in banks

Question 23

What is a financial holding company?

Answer 23

• it’s a legal umbrella that allows both commercial banks and investment banks to be held by the same corp