Terms Flashcards

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1
Q

The New Deal: Government involvement in housing

A

Facilitated homebuyer demand by:
1. Extending the mortgage contract to 30 years
2. Lowering down payment
3. Eliminating the balloon payment at maturity

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2
Q

Why was Fannie Mae Created?

A

Created to augment the mortgage market and accelerate mortgage origination by purchasing mortgage loans.

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3
Q

Fannie Mae Pass Through Security

A

Allowed investors to receive a share of the cash flow from mortgages based on their percent of ownership of the mortgage loan

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4
Q

Freddie v. Fannie

A

They have identical business models: buying mortgages from banks using private capital that has implicit guarantee (GSE)

Freddie = purchased retail and loan (small banks/regional banks/local banks)

Fannie = purchased from commercial banks (bigger)

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5
Q

Government Sponsored Enterprises (GSE)

A
  1. Charter authorized by congress
  2. Special lending and guarantee business
  3. Can raise capital at a much lower rate
  4. No regulatory risk limit
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6
Q

Implicit guarantee for GSE

A

Gives GSE high credit ratings despite massive leverage (high risk in volatile markets)

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7
Q

Who regulates Fannie and Freddie?

A

The Federal Housing Financing Agency (FHFA)

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8
Q

Statutory Capital Requirements of Fannie and Freddie

A
  1. 40x leverage for mortgages
  2. 222x leverage for credit guarantee
  3. Only congress can increase regulations (moral hazard)
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9
Q

What did the FDIC do during the financial crisis?

A
  1. Increased the line of credit with the Treasury to address solvency issues
  2. Unlimited tie FDIC insurance to non-interest bearing deposits
  3. Imposed premiums on banks to refund the depleted DIF
  4. Temporarily liquidity guarantee program
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10
Q

What is the Systemic Risk Exception?

A

Gives the FDIC the ability to do whatever is necessary to stabilize the banking system [AIG bailout]

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11
Q

What does full faith and credit actually mean?

A

Symbol of confidence: The FDIC + DIF funds do not cover all of the deposits in the U.S.

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12
Q

Main bank regulators

A
  1. FDIC
  2. Federal Reserve
  3. OCC
  4. SEC
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13
Q

Who does the FDIC Regulate

A
  1. Non-member state charter banks
  2. Non-member state charter thrifts
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14
Q

Who does the Federal Reserve Regulate

A
  1. State charter banks
  2. Bank Holding Companies
  3. Foreign banks
  4. Foreign ops
  5. SIFI’s
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15
Q

Proprietary Trading

A

Financial institutions buy and sell securities using their own capital for the profit of their own account rather that their clients

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16
Q

The Volcker Rule

A
  1. Restricted commercial banks investments in hedge funds and private equity.
  2. Restricted proprietary trading of securities
  3. Increased transparency
17
Q

The Federal Open Market Commission

A

Responsible for setting monetary policy like the target Fed Funds rate

18
Q

How to Fed aligns Effective and Target Fed Funds Rate

A

EF > T = FOMC will inject liquidity into the market by buying treasuries

EF < T = FOMC will withdraw liquidity from the market by selling treasuries

19
Q

The Federal Dual Mandate

A
  1. Maximum Employment
  2. Price Stability (moderate long-term interest rate)
20
Q

What constitutes a member bank with the Fed?

A

Have to purchase preferred stock in the fed regional bank + be subject to fed regulations

21
Q

Federal Reserve Act Section 13 Article 3

A
  1. Allowed for emergency uncapped loan making under unusual and exigency circumstances
  2. Can give credit to individuals, partnerships, or corporations
  3. Restricted by Dodd-Frank
22
Q

Term Action Facility (TAF)

A
  1. Cash to banks
  2. Designed to inject liquidity into banks without the stigma of using the discount window by auctioning off loans
23
Q

Term Securities Lending Facility (TSLF)

A

Fed lent treasuries against risky assets to provide funding at low cost for risk

24
Q

Term Asset-Backed Securities Loan Facility (TALF)

A

Non-recourse funding for AAA backed securities

25
Q

Department of Treasury actions during the financial crisis

A
  1. TARP
  2. Conservatorship of Fannie and Freddie
  3. Private-public investment program for legacy assets
  4. Temporary guarantee for MMMF
26
Q

OIS [Overnight Indexed Swap]

A

Transactions in an interest rate swap where one received compounded floating rate and the other received fixed rate

27
Q

LIBOR-OIS spread

A

Compare LIBOR rate to the fixed rate of the OIS to measure credit risk and liquidity

Wider spread = greater fear and less confidence = greater risk

28
Q

Maiden Lane 1 [BS - JPM Merger]

A
  1. $30B assets that JPM did not want [NY Fed created a LLC to purchase]
  2. LLC lent $28.81B for up to 10 years at a discount rate and JPM lent $1.15B
  3. Any losses by the LLC were borne by the Treasury
29
Q

Maiden Lane 2 [AIG Rescue]

A
  1. FED gave $85B loan to AIG to avoid bankruptcy
  2. FED bought $20.8B of RMBC securities + NY Fed provided $19.8B in 6 year loan