Deck 5: The Continuing Global Financial Crisis

Question 1

The Glass-Steagall Act of 1933:

A)separated commercial banking activities from investment banking activities.
B)created the Federal Reserve System.
C)developed the system of commercial bank deposit insurance.
D)all of the above

Answer 1

separated commercial banking activities from investment banking activities.

Question 2

Which of the following is NOT another term for a prime mortgage loan?

A)conventional loan
B)top-qual loan
C)conforming loan
D)All of the above are suitable terms for a prime mortgage loan.

Answer 2

top-qual loan

Question 3

Asset-backed securities (ABSs)may be securitized based on:

A)auto loans.
B)home-equity loans.
C)credit card receivables.
D)all of the above

Answer 3

all of the above

Question 4

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 explicitly allowed corporate combinations of commercial banks with other types of financial institutions such as insurance companies and investment banking firms.

Question 5

The authors make it clear that the main source of market failure with collateralized debt obligations lay almost exclusively with the rating agencies.

Question 6

The process of turning an illiquid asset into a liquid saleable asset is called:

A)swapping.
B)wrapping.
C)securitization.
D)creationism.

Question 7

Subprime mortgages did not exceed 8% of all outstanding mortgage obligations by 2007, but by the end of 2008 they were the source of 65% of bankruptcy filings by homeowners in the United States.

Question 8

Which of the following statements concerning credit default swaps is FALSE?

A)As of year-end 2008, CDSs are completely outside of regulatory boundaries.
B)A CDS is a derivative security that may be used for hedging risk or for speculative purposes.
C)In order be a party to a CDO, at least one of either the buyer or seller must own the underlying asset.
D)CDSs allow banks to severe their links to their borrowers, thereby reducing their incentive to screen and monitor the ability of borrowers to repay.

Question 9

Investment banks and stock brokerages have traditionally been regulated by the:

A)Federal Reserve System (FED).
B)Federal Deposit Insurance Corporation (FDIC).
C)Securities and Exchange Commission (SEC).
D)Internal Revenue Service (IRS).

Question 10

Alt-A mortgage loans are NOT eligible for sale to GSEs such as Fannie Mae or Freddie Mac.

Question 11

Securitization may degrade credit quality because the process severs the link of lending and repayment (risk and reward)between the originator of the loan and the borrower.

Question 12

________ is the method of making investments more attractive to prospective buyers by reducing their perceived risk.

A)Subordination
B)Credit enhancement
C)Derivation
D)Deregulation

Question 13

Even though household debt as a percentage of disposable income rose rapidly in the United States in early 2000s, the rate was even greater in Britain, topping out at over 170% in 2008.

Question 14

Credit Default Swaps are highly regulated financial instruments as a result of the Commodity Futures Modernization Act of 2000.

Question 15

From 1990 through 2007, the amount of securitized loans outstanding dropped from over $25 trillion to less than $5 trillion and was a key element in the loss of market liquidity.

Question 16

What is a Collateralized Debt Obligation (CDO)? In your answer explain how CDOs are generally separated into one of three tranches. What types of mistakes were made by security rating agencies that contributed to the collapse of the CDO market?

Question 17

It is pretty clear after reading this chapter that securitization in and of itself is a poor financial idea.

Question 18

Mortgage loans in the U.S. are classified by risk into one of three types: prime, alt-A, and sub-prime.

Question 19

A ________ is a securitized financial instrument that is sold to the market in tranches representing different levels of default risk.

A)guaranteed security asset (GSA)
B)mortgaged backed security (MBS)
C)credit default swap (CDS)
D)collateralized debt obligation (CDO)

Question 20

A ________ is a financial intermediation device that allowed the participant to borrow short and lend long.

A)sub-prime loan
B)structured investment vehicle
C)non-conforming loan
D)all of the above

Question 21

In finance, a liquid asset:

A)sells quickly.
B)sells at or near its market value.
C)both A and B
D)none of the above

Question 22

The three stages of the global credit crisis of 2009-2009 were:

A)1. The failure of commercial and investment financial institutions, 2. the failure of specific mortgage-backed securities, 3. a credit-induced global recession.
B)1. The failure of specific mortgage-backed securities, 2. the failure of commercial and investment financial institutions, and 3. a credit-induced global recession.
C)1. The failure of commercial and investment financial institutions, 2. a credit-induced global recession, 3. the failure of specific mortgage-backed securities credit-induced global recession.
D)1. The failure of specific mortgage-backed securities, 2. a credit-induced global recession, 3. failure of commercial and investment financial institutions.

Question 23

The member nations of the European Union have relative freedom to set their own fiscal policies EXCEPT for which of the following?

A)government spending
B)government taxation
C)government surpluses or deficits
D)government printing of the euro currency

Question 24

Portfolio theory relies on combining assets with ________ return correlation exclusively to reduce risk.

A)highly positive
B)low
C)zero
D)none of the above

Question 25

What is TARP? Provide an argument for why TARP was necessary and successful.

Question 26

Which of the following pieces of U.S. legislation was developed and passed in response to the 2008-2009 international credit crisis?

A)Gramm-Leach-Bliley Financial Services Modernization Act
B)Dodd-Frank Wall Street Reform and Consumer Protection Act
C)Depository Institutions Deregulation and Monetary Control Act
D)The Glass-Steagall Act

Question 27

In October 2009, the new government of Greece estimated the size of the 2009 government budget deficit as 12.7% of GDP rather than the previously published:

A)3.4%.
B)6.7%.
C)8.6%.
D)10.2%.

Question 28

As of 2011, the European countries with the highest debt/GDP ratio were, in order:

A)Greece, Italy, Portugal, and Slovenia.
B)Greece, Italy, France, and Germany.
C)Greece, Italy, Ireland, and Portugal.
D)Greece, Italy, Great Britain, and Portugal.

Question 29

Future financial market regulation must include all of the following EXCEPT:

A)renewed regulatory requirements.
B)increased reporting.
C)greater transparency in pricing and valuation.
D)Regulation must include all of the above.

Question 30

The international credit crisis began in full force in September 2008.

Question 31

When the EU moved to a single currency with the adoption of the euro, its member states agreed to each of the following EXCEPT:

A)a single currency.
B)control of their own money supply.
C)free movement of capital in and out of their economies.
D)In fact, the member states agreed to ALL of the above.

Question 32

Bear-Stearns is the largest single bankruptcy in U.S. history.

Question 33

Debt issued by the national government is called:

A)debenture debt.
B)municipal debt.
C)sovereign debt.
D)none of the above

Question 34

The typical TED spread, the difference between the LIBOR and the interest rate swap index, is typically about ________ basis points.

A)350
B)180
C)120
D)80

Question 35

LIBOR stand for the London Interbank Offered Rate.

Question 36

Which of the following is NOT identified by the authors as a "safe-haven" currency?

A)the euro
B)the British pound
C)the U.S. dollar
D)the Japanese yen

Question 37

The British Bankers Association (BBA)estimates that LIBOR was used in the pricing of more than ________ in assets globally.

A)$100 billion
B)$360 billion
C)$360 trillion
D)$100 trillion

Question 38

The credit crisis was worsened by the destabilizing effects of speculators, in a variety of different institutions, betting that particular instruments or markets or securities would fail.

Question 39

The accounting procedure whereby assets are revalued to market value basis on a daily basis is known as:

A)FASB rule 62.
B)market value accounting.
C)marked-to-market.
D)none of the above

Question 40

Near the end of the U.S. housing boom, many of the mortgages classified as Alt-A were in fact sub-prime.

Question 41

The European Financial Stability Facility (EFSF)has a mandate to safeguard financial stability in Europe by providing financial assistance to euro area Member States.

Question 42

The authors conclude the chapter with a specific road map for future financial regulation.

Question 43

The members of the EU's eurozone (euro participants)do NOT have the ability to conduct independent monetary policy.

Question 44

Ireland and Greece had the same issues lead to their financial crises in 2009. In each case, the previous government had dramatically understated the size of their federal budget deficit as a percentage of GDP.

Question 45

Securitization is likely to be declared illegal in the U.S. though it may still exist elsewhere in the world.

Question 46

Baring the (hopefully temporary setback of 2008)capital is more mobile today than ever before.

Question 47

Every EU member nation has the right to simply print more euros.