Question 1

The blurring of the lines separating the subsets of the financial industry started in the:

Accepted Answer

The blurring of the lines separating the subsets of the financial industry started in the 1990s with the repeal of Glass-Steagall Act, which allowed the merging of commercial and investment banks. This led to the creation of institutions with a combination of functions, such as Citigroup and JPMorgan Chase, and contributed to the development of the modern financial industry.

Question 2

The following programs were part of the Fed's "lender of last resort" efforts in response to the Financial Crisis of 2007-2008, except:

Accepted Answer

While the TARP program was a response to the Financial Crisis of 2007-2008, it was not a part of the Fed's "lender of last resort" efforts. The other three programs listed (TSLF, CPFF, and TALF) were all created by the Fed as a means of providing liquidity to financial institutions and stabilizing the financial system during the crisis.

Question 3

The "bail-out" money that went to giant financial institutions like Citibank and Goldman Sachs, along with General Motors and Chrysler during the Financial Crisis and the Great Recession, came from the:

Accepted Answer

The "bail-out" money came from the Troubled Assets Relief Program (TARP), which was a program created by the U.S. government in 2008 to purchase assets and equity from financial institutions to strengthen the financial sector during the crisis. The American Recovery and Reinvestment Act, Primary Dealer Credit Facility, and Term Securities Lending Facility were all separate programs created during the crisis, but did not provide the funding for the bailouts.

Question 4

The causes of the skyrocketing mortgage default rates that triggered the financial crisis in 2007-2008 include the following, except:

Accepted Answer

Housing prices did not increase drastically as a cause of the crisis; rather, they had risen previously and then began to decline, leading to defaults.

Question 5

Which of the following trends had been happening in the banking industry even before the Financial Crisis of 2007-2008?

Accepted Answer

The trend of consolidation of services offered by financial institutions had been happening before the Financial Crisis of 2007-2008, as large banks were acquiring smaller ones and expanding their operations. This trend continued after the crisis as well, with the largest banks becoming even larger through mergers and acquisitions. The other options were not trends that were happening before the crisis, but rather shifted as a result of the crisis.

Question 6

Traditionally, the Federal Reserve can give emergency loans only to:

Accepted Answer

The Federal Reserve has the power to give emergency loans only to commercial banks. This is done to provide liquidity to the banking system during times of financial stress. The Fed does not provide emergency loans to other types of firms, such as securities firms, investment banks or manufacturing firms.

Question 7

Which of the following is NOT true about so-called mortgage-backed securities:

Accepted Answer

Their use was not strongly discouraged by the Federal government before the financial crisis. In fact, government-sponsored entities such as Fannie Mae and Freddie Mac actively encouraged the creation and sale of mortgage-backed securities in order to promote homeownership.

Question 8

"Thrifts" refer to the following institutions, except:

Accepted Answer

Thrifts refer to institutions that specialize in accepting deposits and making loans, with a focus on residential mortgage lending. Commercial banks, on the other hand, offer a wider range of services, such as business and consumer loans, corporate banking, and investment banking.

Question 9

Securitization, the process of forming new securities by bundling or slicing up groups of securities like mortgages and bonds, is:

Accepted Answer

Securitization is a way of diversifying risk by pooling together multiple securities and creating new securities out of them. This helps in spreading the risk across a larger number of investors and reducing the overall risk of the investment.

Answer: B
 Securitization is a well-established process and is widely used by financial analysts and managers. It is a legitimate financial practice that is used to create new financial instruments and manage risk.

Answer: D
 Securitization is a significant portion of the modern financial system, with trillions of dollars' worth of asset-backed securities issued every year. It plays a crucial role in the global financial system by providing liquidity to investors and allowing for greater diversification of risk.

Option C is incorrect because securitization is considered a legitimate financial practice and is not viewed as shady by legitimate financial institutions.

Question 10

Which of the following financial institutions pool deposits of customers and use the money to buy a portfolio of stocks or bonds or both?

Accepted Answer

Mutual funds pool deposits of customers and use the money to buy a portfolio of stocks or bonds or both. Thrifts primarily offer savings accounts and loans, while brokerage firms buy and sell investments on behalf of clients. Investment banks provide services such as underwriting and mergers and acquisitions.

Question 11

The destabilizing effects of defaulting mortgages quickly spread throughout the financial system because those mortgages were involved in widespread:

Accepted Answer

The securitization of mortgages involves the packaging and selling of mortgage-backed securities (MBS) to investors. When homeowners default on their mortgages, the value of these securities decreases, which can cause losses for investors and financial institutions that hold them. This can lead to a ripple effect throughout the financial system, as institutions that are exposed to these securities suffer losses and may face liquidity problems, potentially triggering a broader financial crisis.

Question 12

The consolidation in the financial industry into fewer and larger firms:

Accepted Answer

During the Financial Crisis of 2007-2008, many financial institutions either failed or were acquired by larger firms, leading to further consolidation in the industry.

Question 13

Which of the following bank-related policies of the Fed fosters huge moral hazard problems:

Accepted Answer

The too-big-to-fail policy of the Fed fosters huge moral hazard problems because it incentivizes large banks to take excessive risks and engage in risky behavior, knowing that they will be bailed out by the government in case of failure. This creates a situation where banks are not held accountable for their own actions, undermining market discipline and increasing the likelihood of future financial crises.

Question 14

When a bank's loans are written off, then the bank's:

Accepted Answer

When a bank's loans are written off, it means that the bank has determined that it is highly unlikely that the loans will be repaid. This results in a decrease in the bank's assets and a corresponding decrease in its reserves. As reserves are a key component of a bank's ability to make new loans, a decrease in reserves limits the bank's ability to make new loans. Therefore, option B is the correct answer. Option A is incorrect because a decrease in reserves limits a bank's ability to make new loans. Option C and D are also incorrect as they do not accurately reflect the impact of loan write-offs on a bank's balance sheet.

Question 15

The Wall Street Reform & Consumer Protection Act of 2010 has the following provisions, except:

Accepted Answer

The Wall Street Reform & Consumer Protection Act of 2010 does not consolidate the operations of Wall Street, commercial banks, and other financial institutions. Instead, it aims to increase regulation and oversight of these institutions to prevent another financial crisis.

Question 16

During the Financial Crisis of 2007-2008, Goldman Sachs, Morgan Stanley, and other financial firms with heavy exposure to the mortgage-related problems rushed to become bank holding companies in order to:

Accepted Answer

By becoming bank holding companies, these firms gained access to the Federal Reserve's emergency lending facilities, allowing them to secure massive loans to stabilize their operations during the crisis.

Question 17

The following financial institutions traditionally accept deposits from savers, except:

Accepted Answer

Investment banks do not traditionally accept deposits from savers. They primarily engage in securities underwriting and trading, mergers and acquisitions, and other forms of financial advisory services for corporate clients. Thrifts, mutual fund companies, and pension funds all accept deposits from savers in one form or another.

Question 18

The government bail-out of large institutions creates the problem of moral hazard, which means that these large firms will:

Accepted Answer

When large firms know that the government will bail them out if they make highly risky investments, they have less of a disincentive to do so. This creates the problem of moral hazard, as firms are more likely to take on excessive risks, knowing that they will not bear the full costs of any failures.

Question 19

The so-called too-big-to-fail policy has two conflicting sides: on one hand there's the moral hazard problem that it creates, but in the other hand the Fed must:

Accepted Answer

The too-big-to-fail policy is meant to protect the stability of the banking system, as the failure of a large bank could have severe repercussions on the entire economy. While it does create a moral hazard problem by incentivizing banks to take on riskier behavior, the potential consequences of not bailing out a large bank outweigh this concern. The other options listed (promoting competition, ensuring employment, controlling the money supply) are not the main goals of the too-big-to-fail policy.

Question 20

The so-called moral hazard problem refers to one's tendency to:

Accepted Answer

The moral hazard problem refers to the tendency of individuals or entities to take on greater risk when they are partially insured against losses. This is because they may feel insulated from the full consequences of their actions and therefore more willing to take risks. For example, banks that are insured by the government may take on greater risks than they would otherwise, because they know that the government will step in to bail them out if things go wrong.

Quiz 14: Money, Banking, and Financial Institutions