Deck 24: Investment Banks and Private Equity

Question 1

Created by Goldman Sachs, what was Abacus?

A)A credit product
B)A synthetic collateralized debt obligation (CDO)
C)A ponzi scheme
D)A merger and acquisition

Answer 1

B

Question 2

What happens during the second half of a fund's lifespan?

A)Harvesting
B)Growing
C)Drawing down
D)Improving

Answer 2

A

Question 3

In 2013, the SEC found the Goldman Sachs trader who was responsible for creating and selling Abacus guilty of defrauding investors. What were the results of this case?

A)The man who created and sold Abacus was fined $825,000.
B)The man who created and sold Abacus was fined $2 million, half of which went to the investors who lost money.
C)Goldman Sachs was fined $3 million, and the man who created Abacus was sentenced to a year of community service.
D)Goldman Sachs was fined $3 million.

Answer 3

A

Question 4

After passage of the Gramm-Leach-Bliley Act of 1999, Robert Rubin resigned as secretary of the Treasury Department and did what?

A)He chaired a subcommittee on Financial Institutions to craft further reforms in investment banking.
B)He became chief executive at Wachovia and oversaw its sale to Well Fargo as a result of the legislation.
C)He wrote a book called Why I Left Goldman Sachs , detailing how the legislation benefited investment banks.
D)He became an advisor to Citigroup, which had benefited from the legislation.

Question 5

Investment banks began in the United States in the 1800s for which of these primary reasons?

A)During industrialization, European sources were offering better terms for loans to US businesses.
B)Commercial banks were more willing to lend to individuals than to growing businesses.
C)Commercial banks were not yet in existence in the United States.
D)During US industrialization, businesses could not raise the funds they wanted from US sources alone.

Question 6

What two main categories does a private equity firm have?

A)Buyouts and alternative assets
B)Primary offerings and seasoned offerings
C)Buyouts and venture capital
D)Venture capital and alternative assets

Question 7

Who manages the private equity partnership?

A)General partners
B)Limited partners
C)Chief executive officer
D)Shareholders

Question 8

In client-related trading, which of these areas have historically been some of the most profitable, but also experienced major losses during the financial crisis of 2008-2009?

A)Credit products, green trading, and fixed-income trading
B)Fixed-income trading, equities trading, and prop trading
C)Commodities trading, fixed-income trading, and credit products
D)Green trading, prop trading, and equities trading

Question 9

One scathing review of investment banks of the 2000 to 2010 era was summed up by the quote that investment banks became a place where "ripping off " unsuspecting institutional clients was "the gold standard." Where did this review come from?

A)Alan Greenspan, chair of the Fed during part of that decade
B)Greg Smith, a former Goldman Sachs investment banker
C)Securities and Exchange Commission (SEC)
D)Fabrice Tourre, a former vice president of Goldman Sachs

Question 10

In which area do critics accuse investment banks of only being interested in pocketing fees?

A)Market making
B)Commodities trading
C)Client-related trading
D)Mergers and acquisitions

Question 11

Who bears the settlement risk when investors do not follow through on a commitment to purchase securities?

A)Securities and Exchange Commission
B)Issuing corporation
C)Federal government
D)Underwriting syndicate

Question 12

The waterfall takes place

A)when the general partners need funds.
B)as each portfolio firm is sold.
C)after the hurdle rate is paid.
D)during clawback.

Question 13

Which of the following left Goldman Sachs and went to Washington, DC, to repair Fannie Mae and Freddie Mac?

A)Robert Rubin
B)Robert Steele
C)William Dudley
D)E. Gerald Corrigan

Question 14

What is the term for the sale of stocks or bonds by a corporation, government, or government agency that has issued similar stocks or bonds in the past?

A)Secondary offering
B)Seasoned offering
C)Private placement
D)Roadshow

Question 15

In the 1980s, how did deregulation contribute to the culture change in investment banks?

A)Investment banks were not allowed to earn commissions on big blockbuster deals.
B)Investment banks expanded their merger and acquisition (M&A)activity.
C)Investment banks became "gatekeepers" who decided which corporations would be "allowed" to issue stock or debt.
D)Investment banks remained closely held partnerships that never went public.

Question 16

When a group of investment banks buys all of the securities from the issuer and then resells those securities to investors, that group and that process are known in what way?

A)This is accomplished by an underwriting syndicate; the process is called underwriting.
B)This is accomplished by a banking collective; the process is called underwriting.
C)This is accomplished by equity traders; the process is called a roadshow.
D)This is accomplished by bond traders; the process is called a roadshow.

Question 17

Which of the following areas did NOT experience losses during the 2008 financial crisis?

A)Commodities trading
B)Fixed-income trading
C)Credit products
D)Market making

Question 18

How many years do private equity funds traditionally last?

A)5
B)10
C)15
D)20

Question 19

All but one of these people went to work for either the US Treasury or the Fed after working at Goldman Sachs. Which one of these men did NOT work for Goldman Sachs before going into government service?

A)William Dudley
B)Robert Steel
C)Robert Rubin
D)Fabrice Tourre

Question 20

Private equity is considered a very risky, non-liquid investment vehicle for which of these reasons?

A)Many institutions that are bought will never be successful and only half of all start-ups survive.
B)Most established institutions that are bought out will be profitable, but very few start-ups will survive.
C)People who are unfamiliar with private equity tend to make poor investments in this arena.
D)The riskiness of investing in troubled businesses or start-ups is compounded by so-called "dumb money."

Question 21

__________ brought private equities into the limelight during the 1980s.

A)Leveraged buyouts (LBOs)
B)Collateralized debt obligations
C)Clawbacks
D)The Abacus case

Question 22

Why would a private equity firm use leverage in a buyout?

A)It looks better on the balance sheet.
B)It reduces the initial investment.
C)It leaves more cash available for restructuring.
D)The interest payments are tax deductible.

Question 23

Prior to deregulation, investment banks were seen as gatekeepers, allowing only respected corporations to issue stock or debt.

Question 24

What is the reasoning for taxing capital gains at a lower rate?

A)To encourage short-term, large investments
B)To encourage long-term, large investments
C)To benefit smart money
D)To make stocks more costly

Question 25

Which of these is not an argument against taxing capital gains at a much lower rate than income is taxed?

A)Lower capital gains taxation, even 0%, might be necessary to induce people to take the significant risks needed to grow an economy.
B)Lower taxes on capital gains may be fair, as there is inherent risk and individuals also faces losses, but 0% is never acceptable.
C)Many wealthier Americans end up paying a lower overall tax rate than do middle- and low-income Americans.
D)Wealthier Americans should pay a larger percentage of taxes on all income.

Question 26

Compare and contrast industry defense of buyouts to critics' comparison of the process to a bust out by organized crime.

Question 27

Why is deregulation blamed for the culture shift in investment banks?

Question 28

The term "private equity" really does not fit because all of the firms in the portfolio have issued stock.

Question 29

What is one of the most debated aspects of private equity?

A)The traditional 10-year time frame
B)The benefits being greater than the risks taken
C)The lower tax rate
D)High management fees

Question 30

Explain the justification (right or wrong)for "too big to fail."

Question 31

Private equity firms usually either make high rates of return or lose everything; they are rarely in between.

Question 32

Before he was appointed as chair of the Fed in 2018, then-Governor Jay Powell was quoted as saying, in regard to banks, that he would "continue to consider appropriate ways to ease regulatory burdens."

Question 33

Which of the following would be an example of dumb money?

A)After 10 years in the oil field and 15 years consulting, Paul was made GP of a private equity firm.
B)Completing a bachelor's and master's degree in finance in 5 years, Jonathan is made GP of a private equity firm.
C)Ellen started and sold several companies before moving into consulting and has just recently become GP for a private equity firm.
D)Susan was an editor and then publisher for several imprints before becoming a GP.

Question 34

In clawback, early returns are repaid to

A)general partners.
B)limited partners.
C)portfolio firms.
D)equity traders.

Question 35

During the LBO craze, when several troubled firms merged into one firm to reduce overhead, this was referred to as a rollup. What were some of the general methods used to turn these firms around?

A)Investors would supply large amounts of funding for the new, larger entity to encourage growth.
B)Investors typically allowed 10 or 20 years to see a return on these investments.
C)Investors would typically eliminate employees and reduce the salaries and wages of those who remained.
D)Investors would consult with management of the several firms bought out to increase long-term profitability in the new, merged business.