Further Reading: The Global Financial Crisis Flashcards
What are Coffee’s Three Preconditions for Financial Crisis? (GMR)
- Gatekeeper Failure.
- Managerial Failure.
- Regulatory Failure.
J.C. Coffee Jr. – What Went Wrong? An Inquiry into the Causes of the 2008 Global Financial Crisis (1-3)
What were the Acute Preconditions that primed the GFC? (MIC-PS-FI)
In consequential order:
- US Macroeconomic Imbalances;
- Very low Interest Rates;
- Very cheap Credit;
- Increased investor Profit-Seeking; and
- Increased Financial Innovation.
What enabled Investment Banks to succeed with Securitization?
- Their ability to sell well-rated securitized assets to investors.
- Their ability to induce or coerce ratings agencies into rating said assets favorably.
J.C. Coffee Jr. – What Went Wrong? An Inquiry into the Causes of the 2008 Global Financial Crisis (4)
What type of Asset Bubble was the GFC, and why?
- Supply-Side Asset Bubble.
- The bubble was fueld by originators’ drive for profits and disinterest in performing due diligence.
J.C. Coffee Jr. – What Went Wrong? An Inquiry into the Causes of the 2008 Global Financial Crisis (5)
What were the Chief Drawbacks of the Asset-Backed Securitization Strategy for Investment Banks? (DL-DD)
- Lack of Diversification.
- Extreme Leverage levels.
- Disincentivization of Due Diligence.
J.C. Coffee Jr. – What Went Wrong? An Inquiry into the Causes of the 2008 Global Financial Crisis (3-4, 6)
Credit Rating Agencies are an example of Gatekeepers. What are the systemic reasons that underlie their falure? (PP-CL-N-CI)
- Privileged Power gained from a regulatory licence.
- Lack of Competition.
- Lack of real Liability.
- Non-Requirement to verify information provided by lenders.
- Conflict of Interest that arises from getting paid by the lenders they rate.
J.C. Coffee Jr. – What Went Wrong? An Inquiry into the Causes of the 2008 Global Financial Crisis (7-8)
What were the Acutre Reasons that underlaid the Failure of Credit Rating Agencies?
- Structured finance being a lead revenue source, as it was controlled by a few big banks.
- New competition, i.e. Fitch, which motivated incumbents to release unduly high ratings.
J.C. Coffee Jr. – What Went Wrong? An Inquiry into the Causes of the 2008 Global Financial Crisis (8-9)
What were the core shortcomings of the SEC’s CSE (Consolidated Supervised Entities) Program? (CLMP)
- Lower Net Capital Standard.
- Limitless Leverage.
- Monitoring Inabilities.
- Power Insufficiencies.
J.C. Coffee Jr. – What Went Wrong? An Inquiry into the Causes of the 2008 Global Financial Crisis (13-14)
How did Inter-Bank Competition impact the real-estate asset bubble?
The, “competitive pressure,” lead to reckless expansion.
J.C. Coffee Jr. – What Went Wrong? An Inquiry into the Causes of the 2008 Global Financial Crisis (16)
According to Acharya and Richardson, what was the Central Cause of the GFC?
“[B]anks’ efforts to circumvent… capital-adequacy requirements.”
V. Acharya & M. Richardson – Causes of the Financial Crisis (197)
What is the Minimum Capital Adequacy Requirement under the Basel Accords?
8%.
Why is Maintaining a Capital Buffer Costly for a Bank? (CER)
- The Capital is static.
- Taking on Equity dilutes shareholding power.
- Using Retained earnings stifles future growth.
V. Acharya & M. Richardson – Causes of the Financial Crisis (198)
Under the Basel Accords, which assets can comprise a Bank’s Capital Buffer?
- Equity.
- Retained Earnings.
How has Securitization evolved the Full Intermediation model?
By enabling self-underwriting, securitization allowed banks to intermediate between both depositors and investors and borrowers.
V. Acharya & M. Richardson – Causes of the Financial Crisis (199)
Who were the Primary Purchasers of Asset-Backed Securities, and what was their Goal?
Banks themselves, having the goal of circumventing capital adequacy requirements.
V. Acharya & M. Richardson – Causes of the Financial Crisis (200)
How did Banks go about purchasing asset-backed securities?
Through the use of off-balance-sheet-vehicles (OBSVs), e.g. special investment vehicles (SIVs).
V. Acharya & M. Richardson – Causes of the Financial Crisis (201)
How did OBSVs enable Investment Banks to become their own Underwriters?
The SIVs would utilize their asset-backed securities to issue asset-backed commerical paper, which the investment bank would then underwrite.
V. Acharya & M. Richardson – Causes of the Financial Crisis (201)
What was the Effect of Investment Banks effectively becoming their Own Underwriters?
- Reinternalization of the ABSs’ original risk.
- Legitimization of the ABSs in the eyes of ratings agencies.
V. Acharya & M. Richardson – Causes of the Financial Crisis (201)
Why, amongst others, were subprime mortgages particularly the asset of choice for CDO origination?
- High risk premium.
- Capital adequacy requirements circumvention.
V. Acharya & M. Richardson – Causes of the Financial Crisis (204-205)
Upon what Theoretical Foundation was the Pre-2008 Regulatory Infrastructure predicated upon?
The Efficient Market Hypothesis, alongside its corollaries and regulatory implications.
James Crotty – Structural Causes of the Global Financial Crisis – A Critical Assessment of the ‘New Financial Architecture’ (564)
From a Corporate Governance perspective, which issues does the GFC emblemize? (ST-IIC)
- Short-Termism.
- Perversion of Incentives.
- Regulatory Impotence.
- Regulatory Capture.
From the perspective of pricing, how are CDOs problematic?
Their inherent complexity and opacity makes them virtually impossible to accurately price.
James Crotty – Structural Causes of the Global Financial Crisis – A Critical Assessment of the ‘New Financial Architecture’ (566-567)
According to Crotty, Why did Banks hold on to MBSs and CDOs? (PARLDF)
- High-Risk Premium.
- Assets just piled up.
- Reduce CARs.
- Legitimize the assets.
- Downplay moral hazard.
- MBSs were CDO Fodder.
James Crotty – Structural Causes of the Global Financial Crisis – A Critical Assessment of the ‘New Financial Architecture’ (568-569)
According to Crotty, what are the Flaws of Bank Self-Evaluation of Risk, i.e. Value at Risk (VAR)? (OHAA)
- Off-the-books assets were unaccounted for.
- Historical data is ≠ current risk levels.
- Asset-price correlation matrices ≠ real asset prices during crises.
- Abnoraml distribution of security prices.
James Crotty – Structural Causes of the Global Financial Crisis – A Critical Assessment of the ‘New Financial Architecture’ (571-572)
How did Globalization exacerbate the Global Financial Crisis?
It created worldwide in-roads for financial contagion to spread.
James Crotty – Structural Causes of the Global Financial Crisis – A Critical Assessment of the ‘New Financial Architecture’ (572-573)
To Summarize, what were the Causes of the Global Financial Crisis? (URCC)
- Lax Underwriting Standards.
- Poor Regulatory Performance.
- Complexification of securitized products.
- Collateralization using increasingly poor assets.
IMF, “Containing Systemic Risks and Restoring Financial Soundness” (2008) Global Financial Stability Report (xiii– xiv).
