Chapter 6: The Great Recession of 2007-2009

Question 1

The Great Recession of 2007-09: in early 2000s some managers blank profits and hid liabilities; some hid risky investments from investors

Answer 1

inflated profits

Question 2

All corporations have CPAs that audit their financial statements. But top execs can hide things from blank

Answer 2

auditors

Question 3

in 2002 the Sarbanes-Oxley Act of 2002 required that CEOs personally certify the accuracy of their financial statements. Auditors had to state any conflicts of interest

Answer 3

accuracy of their financial statements

Question 4

2007-09 was the worst blank since the Great Depression

Answer 4

Recession

Question 5

Why? Problems with the market for blank mortgages

Many US citizens–more than ever–take out a mortgage loan (often blank rate ones) to buy a house

Answer 5

Problems with the market for home mortgages
Many US citizen took out a mortgage loan
often adjustable rate ones to buy a house

Question 6

the banks sold their mortgage loans to other institutions, such as Fannie Mae and Freddie Mac, entities once owned by the gov’t but sold to stockholders in the 1960s

Answer 6

banks sold their mortgage loans to other institutions

Fannie Mae and Freddie Mac

Question 7

banks owned blank percentage of mortgages in the US

Answer 7

90% of the mortgages in the US

Question 8

investment banks, such as Lehman Brothers, start to securitize mortgages, buying mortgages and then bundling hundreds together and then selling them as bonds to investors

Answer 8

bundle supposed to minimize risk

Question 9

the investor would receive regular blank

Answer 9

interest payments

Question 10

the money to pay the investor came from the

Answer 10

house payments

Question 11

in the early 2000s many ARM mortgages being granted by bank and other institutions were to be blank borrowers, blank borrowers with low credit scores and Alt-A borrowers, those who were not required to show their incomes to get a loan

Answer 11

ARM mortgages
granted by bank to other institutions
high-risk borrowers with LOW credit scores
and Alt-A borrowers, not required to show incomes to get a loan

Question 12

US blank of homes sharply increased in the early 2000s.

Answer 12

construction

Question 13

loans for homes were easy to get so blank was high

Answer 13

demand for homes

Question 14

since demand for homes was high housing prices soared until mid 2006, when the bottom fell out; prices sharply declined, falling by almost blank percent

Answer 14

demand up 
prices up 
bottom fell out
prices down 
prices fell by 33%

Question 15

US interest rates, long held at blank rates and then began to blank; adjustable rate mortgages rose

Answer 15

low rates and then began to rise

Question 16

Dow Jones hits 14,165 in Oct, 2007

Answer 16

info

Question 17

US unemployment is at blank in Dec 2007, full employment

Answer 17

US unemployment is at 4.9% in Dec 2007, full employment

Question 18

In 2007, as ARMs rates adjusted and house payments blank many housing borrowers began to default (late on payment)

Answer 18

adjustable and house payments increased many housing borrowers began to default because they were late on payments

Question 19

After housing borrowers were defaulting on their loans, blank happened in constructions

Answer 19

layoffs

Question 20

When homeowners failed to pay their monthly mortgage bill, the mortgage backed securities could no longer make monthly interest payments to the investors. Thus, the value of mortgage backed securities began to fall. Many US financial institutions had inventories of mortgage-backed securities. As these assets declined in value, the banks’ asset values fell. Many became insolvent, with their liabilities > assets. Many traditional US financial institutions began to fail.

Answer 20

homeowners fail to pay
mortgage backed securities don’t make payments to investors
value of mortgaged backed securities began to fall
US financial institutions had lots of mbs
assets declined
bank asset’s fell
liabilities > assets – insolvent
institutions failed

Question 21

Oil prices hit record highs at blank per barrel in July 2008

Answer 21

$145/barrel

Question 22

Gallon of gas sells for more than $4. SUV and pickup sales blank. Massive blank in the car industry.

Answer 22

gas $4 per gallon
SUV and pickup sales plummet
Massive layoffs in car industry

Question 23

US dollar blanks in the Great Recession

Answer 23

strengthens

Question 24

When the US dollar strengthens, this blanks US export sales

Answer 24

reduces

Question 25

When the US dollar strengthens, this reduces US export sales such that blanks in US exports industry

Answer 25

layoffs in US export industries

Question 26

Exports to foreigners can’t blank

Answer 26

sell

Question 27

Fall 2008, Freddie and Fannie became a part of the US gov’t after China, who owns much stock in them, pressures the US gov’t to prevent failure

Answer 27

US owns Freddie and Fannie

Question 28

March 2009. The Dow Jones plummets to a low of blank

Answer 28

6627, a market crash