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Economics > Week 7 > Flashcards

Week 7 Flashcards

1
Q

Explain this off balance sheet financing

A

The retai investor gives money to a money making mutual fund. This fund gives money to the bank and receives collateral in return. Simply because traditional banking cannot insure this amount of money. The colalteral is handed over in the form of securitized bonds. The money making mutual fund may also get these securitized bonds directly from the bond making vehicle. the securization vehicle get money and bonds from the securization vehicle

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2
Q

What does repo stansd for?

A

Sales and repurchase agreements

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3
Q

What si repo?

A

It is actually a new type of banking, another way of paying back. It is a deposit at a bank which is short term, receives interest rates and is backed by collateral. The deposiutor takes legal ownership

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4
Q

How would a ordinary business transaction work when money cannot be paid back?

A

you go to the court andd would say that the other party has not paid the money back and a file for bancruptcy would start.

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5
Q

Why were a large part of bonds carved out of the bancruptcy code in 2005?

A

The market participants wanted it. What you used to let us do - government bonds - is not enough

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6
Q

How does a repo agreement handle bancruptcy?

A

a repo is a safe harbour because in a rrpo agreement you would just sell off the collateral. This is a very effective, simple and low cost way of making sure the money ispaid back

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7
Q

HOw many types of ripo are there?

A

bilateral and tripo

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8
Q

What is a bilateral ripo?

A

two different parties are directkly contracting

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9
Q

What is a tri-party ripo?

A

With an investment bank in the middle

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10
Q

Why does tri party ripo bring its own problems?

A

Because J.P.Morgan would now be on the hook if anything happens.

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11
Q

What does rehypothecated mean?

A

reused. So basically they are allowed to sell the bond etc.

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12
Q

Will collateral often exceed the amount of money in a repo?

A

Yes, absolutely. The bond might lose value.

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13
Q

What is the name of the discrepancy between the value of the collateral and the money in a repo agreement?

A

a haircut

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14
Q

Why is a haircut in a collateral a good indicator for anxiety?

A

the bigger the haircut, the bigger the anxiety. It is called the run on repo.

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15
Q

How important was repo financing in the crisis?

A

It was very important. Arounf 400 billion in 2008. 15 trillion of financial instrument of the 5 major investments banks at the time. The percentage financed by repo ewas about 42% for these banks. So it was a very significant for of financing

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16
Q

What does GSE stand for?

A

Government sponsored entreprises

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17
Q

Were Freddie May and Freddie Mac private?

A

Yes, they were

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18
Q

How much of the morgage market did Fannie May and Freddie Mac own?

A

nearly half of the morgage market

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19
Q

What kind fo loans did Fannie May and Freddie Mac guarantee?

A

only conforming loans (not over 417 000) etc. and where the borrowwers met certain conditions 20 down etc.

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20
Q

What did the totals of Fannie May and Freddie Max also include?

A

portfolio loans that had been purchased as investments

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21
Q

Did the GSE guarantee subprime loans?

A

No, but the ybought many

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22
Q

When did the GSE go into government conservatisship

A

September 07, 2008

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23
Q

How did the stock prices of the GSE develop?

A

from 40 dollar in December 2007 to 5 in August 2008

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24
Q

Why did the stock prices of Fannie May and Freddie Mac rebound somwhat in Feb 2008?

A

Because of the rescue of Bear Stearns

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25
Q

Are the GSE´s cullpable for the crisis?

A

Vey difficult in part because their participation had been outsized for a very long time. If, it was a model that was flawed caused y the global saving glut.

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26
Q

When did the bancruptcy of Lehman Brothers happen?

A

15 September 2008

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27
Q

How was the situation in March 2008?

A

Just as precarious at Lehman Brothers as it was at Ber Stearns

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28
Q

Why did Lehman survive longer than Bear Stearns?

A

Because some shady accounting made them look better at the time

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29
Q

What did the FED do to help banks like Lehman Brothers

A

the PDCF, the Primary Dealer Credit Facility.The point of the PDCF was to provide liquidity to non-bank dealers like Lehman Brothers that they did not get in the past. So when a commercial bank, when a traditional commercial bank needs liquidity, when they need to borrow funds, they’re able to go to the discount window at the Federal Reserve. They may go to the Federal Reserve and they may borrow by putting up collateral. Prior to March of 2008, this was an option that was not available to the investment banks. Bear Stearns did not have the ability to go and use the discount window.

30
Q
A
31
Q

Did Lehman Brothers make use of the PDCF?

A

Yes, they did.

32
Q

What made people unwilling to lend to Lehman Brothers?

A

the uncertainty

33
Q

What did people do who lended to Lehman

A

demanded bigger haircuts on repo and shortened the maturity.

34
Q

Why was J.P Morgan anxious to be in the same position as it had been for Bear Stearns?

A

becuase if Bear Stearns had declared bancruptcy in the middle of the day, it would have been left with many of the obligatinos

35
Q

What did the US governmenr try to do over the weekend of the 12 - 14 of Septmeber

A

try to rescue Lehman Brothers, unsucessfully

36
Q

What did the government say abuot rescuing

A

no money for rescuing. Many believed it was important to send this message.

37
Q

Who was the favourite canidate to buy Lehman Brothers?

A

Bank of America. Howevre, it bought Meryll Linch

38
Q

Whom did the negotiators turn to after Bank of America had declined?

A

Barclays. They agreed but the problems with the shareholders were insurmountable. It could not b e done in the time.

39
Q

What does MMMF stand for?

A

Money making mutual funds

40
Q

Which connections was missed when nalysts said they knew the consequences of a bank such as Lehman would have?

A

Its connection to MMMF´s

41
Q
A
42
Q

What are money making mutual funds?

A

Money market mutual funds are a specific kind of investment company. We discussed them as one important part of the shadow banking system in an earlier lesson of this module.

43
Q

What kind of securities are money making mutual funds allowed to use?

A
44
Q

What can MMMFs only own?

A

hort term highly rated sucurities.

45
Q

Which famous fund broke the buck on septmeber 16, 2008?

A

They have the right at this time to report stable values for their share prices. This is to say that if their portfolio was actually worth 99.8 cents on the dollar.On September 16, 2008, Reserve Primary Fund, a very large and longstanding money market mutual fund And, broke the buck. And they broke the buck meaning that their value of their portfolio fell below what they were allowed to round up to 100 cents on the dollar. Which in this case was 99.5 cents.

46
Q

Did the parent entity of Reserve Primary fund have enough money to round up ?

A

No, they did not have enough money to round up

47
Q

What diod ther fact that parentshelped these funds out made people think?

A

it made people feel even safer

48
Q

Why did the amount of money in MMFs increase after the ABCP crisis?

A

People no longer invested in ABCP and therefore invested in MMMFs that they believed to be safe.

49
Q

What does AIG stand for?

A

American international group, a large insurance comopany that slo insured structured products.

50
Q

What does a CDS do? A credit default swap

A

They would take on positions that were effectively promising if something goes wrong with your securities, with your asset back securities, your mortgage back securities, your collateralized debt obligations, any of those fancy three letter acronyms, then we will pay you for it. We will insure that.

51
Q

What happened when the markets lost money

A

They lost insurance losses

52
Q

What kind of pressures did AIG also experience?

A

Pressure in CP and repo

53
Q

Why does ratings downgrading have so deleterious effects on AIG?

A

because people rely on insurances that they xan pay back. They also had to pay a lot of collateral

54
Q
A
55
Q

What were the consequences of all of these weaknesses?

A

It led to a drain of cash

56
Q

Was private rescue possible after Lehman?

A
57
Q

How much did the FED pay for the rescue?

A

85 billion

58
Q

What kind of market collapsed with the repo market?

A

the secured markets

59
Q

Where do we see the panic in spreads?

A

repo rates, haircuts etc.

60
Q

What was the average haircut in Jan 2007?

A

0%

61
Q

What was the haircut in Jan 2009

A

50%

62
Q

Were the pressures in this financial crisis new?

A

Yes, they were.

63
Q

What was the first pressure?

A

Rising spreads and rnus on unsecured debt

64
Q

What was the second pressure?

A

Fire sales of assets in liquidation

65
Q

What was the third pressure?

A

Uncertainty on balance sheets

66
Q

What was the forth pressure?

A

haircuts on bilateral repos

67
Q

Were was the in tri party repos?

A

at the clearing banks

68
Q

Was was the sixth pressure

A

collateral calls

69
Q

WERE THESE PRESSURES NEW

A

No, many of them were not

70
Q
A

Economics (12 decks)

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