Question 1 1. Short sellers created the financial crisis by increasing the cost of equity to financi

Question 1
1.
Short sellers created the
financial crisis by increasing the cost of equity to financial institutions
such as AIG and Lehman Brothers.
Answer True
False
2.12766 points
Question 2
1.
In the run-up to the crisis,
AIG, the largest U.S. insurance company, would accumulate a one-half trillion
dollar position in credit risk through the OTC market. Since AIG set aside
capital in amounts sufficient to cover a multiple of expected losses on these
positions, regulators allowed AIG to sell CDS to lower the risks faced by
commercial banks.

Answer True
False
2.12766 points
Question 3
1.
The mortgage pipeline refers to
the stages of transactions that takes mortgage credit from origination through
pooling and then sale in the capital and money markets via securitization
transactions.
Answer True
False
2.12766 points
Question 4
1.
Goldman Sachs lost billions of dollars in arranging, underrating,
selling and trading synthetic CDOs between 2004 and 2007. This was one of the
main causes of the financial crisis.
Answer True
False
2.12766 points
Question 5
1.
According to Alan Blinder the
compensation schemes at investment banks linked the wealth of bankers to the
risks of the assets the bank securitized.This is why the crisis of 2007-2009 never reached the same
proportions as the crisis of the 1930s. In addition the partnership structure
of investment banks during the 1920s increased the principle agent problem.
Answer True
False
2.12766 points
Question 6
1.
Warren Buffet was selling financial institutions like Goldman
Sachs and Bank of America short during 2008 and this made the crisis worse; but
created wealth for the owners of Berkshire Hathaway.
Answer True
False
2.12766 points
Question 7
1.
Repo lenders require collateral
as security. Often this security was MBS. When the MBS began to lose value in
2008 as ratings were lowered; lenders required borrowers to post additional
collateral. As lenders sold assets to raise cash collateral values fell further
requiring additional sales. This downward spiral in debt prices is indicative
of a worsening financial crisis.
Answer True
False
2.12766 points
Question 8
1.
MBS add no value because
investors will pay the same for a portfolio of mortgages as they will for the tranches
of securities issued by a securitization trust to finance the mortgage pool.
Answer True
False
2.12766 points
Question 9
1.
Your bank owns $10 million of
debt issued by the government of Cyprus. The risk of the debt is depressing the
value of your bank. You can sell the debt but if you do so you will realize a
significant loss. You believe that there is a high chance that Cyprus will
default on its debt sometime in the next five years. You also believe that if
Cyprus can manage to stay solvent over the next five years it will begin to
recover and honor all of its outstanding debt. To manage this risk you can sell
CDS on Cyprus debt.
Answer True
False
2.12766 points
Question 10
1.
Securitization
has allowed banks to originate more loans than they can ultimately finance on
their balance sheets.
Answer True
False
2.12766 points
Question 11
1.
The
FCIC report gives credit to the regulators for slowing down the rate of
securitization and thus avoiding an even larger bond market crisis.
Answer True
False
2.12766 points
Question 12
1.
In 2009 AIG paid $806 million to Goldman because there was a
credit event on a super senior tranche issued by Abacus 2004-1. Goldman was the
buyer in the CDS transaction and AIG was the seller.
Answer True
False
2.12766 points
Question 13
1.
Goldman Sachs sold CDS to AIG
to protect the Goldman investment in the Abacus 2004-1 CDO.
Answer True
False
2.12766 points
Question 14
1.
If AIG had failed the CDS it
had written could not have been honored. This was not a problem for Goldman
Sachs because Goldman had hedged all of its exposure to AIG.
Answer True
False
2.12766 points
Question 15
1.
Investment
banks and commercial banks had securitized and sold virtually all of their
mortgage assets by the Fall of 2008 so that subprime risk had been shifted to
shadow banks and sovereign wealth funds. Banks failed because the volume of
mortgage origination ground to a halt after Lehman Brothers collapsed not due
to losses on subprime mortgages.
Answer True
False
2.12766 points
Question 16
1.
The
authors of the Financial Crisis Inquiry Report were not concerned that from
1999 to 2008, the financial sector expended $2.7 billion in reported federal
lobbying expenses; individuals and political action committees in the sector
made more than $1 billion in campaign contributions because the banking
regulators were watching out for the public good.
Answer True
False
2.12766 points
Question 17
1.
CDS were used by financial institutions to protect portfolios of
bonds from erosion in value. A major writer of CDS was AIG Financial Products.
When AIG Financial Products became less and less solvent the value of the CDS
fell and this increased the risk of default by financial institutions that relied
on the insurance offered by CDS contracts as a protection against credit events
(defaults on the underlying assets).
Answer True
False
2.12766 points
Question 18
1.
Government expenditures
increased as the financial crisis became more serious in 2008-2009.

Answer

This increase in expenditures
decreased private profits.

Increased and stabilized
private profits.

Was neutral with respect to
profits.

Destabilized the economy further, making the crisis worse.

2.12766 points
Question 19
1.
In 2008 the Federal Reserve refused to act as lender of last
resort during the last crisis because Bernanke believed that bank executives
had ripped off society. In addtion Bernanke feared the long term affects of
moral hazard.
Answer True
False
2.12766 points
Question 20
1.
MBS add value because investors
will pay more for the tranches of securities issued by a securitization trust
to finance the mortgage pool than they will for the unsecuritized pool of
mortgages.
Answer True
False
2.12766 points
Question 21
1.
AIG faced large margin calls
against the CDS it purchased between 2005 and 2007.
Answer True
False
2.12766 points
Question 22
1.
The securitization of financial
assets including sub-prime mortgages shifted risk from the banks that
originated the loans to the borrowers.
Answer True
False
2.12766 points
Question 23
1.
In 2008 it was estimated that
no more than 20% of CDS were “nakedâ€.
Answer True
False
2.12766 points
Question 24
1.
CDS are exactly like car insurance
policies. It is not possible to insure your neighbor’s car and it is not
possible to buy a CDS on a bond you do not own.
Answer True
False
2.12766 points
Question 25
1.
The AAA rated class of a CDO
squared hasalways has the same credit risk
as a bond issued by a AAA rated corporation. This is because ratings capture
all credit risk. This is the point of ratings. This was proven during the
financial crisis.
Answer True
False
2.12766 points
Question 26
1.
You are told that the price of
five year CDS on Meritor, Inc. Bonds is 495 basis points. The dollar cost per
year to insure your $10 million portfolio of Meritor Bonds over the next five
years from a credit event will be:
Answer

$4,500

$45,000

$1,000,000
x 49%

$495,000

2.12766 points
Question 27
1.
FNMA
and Freddie Mac did not originate mortgages; they purchased them—from banks,
thrifts, and mortgage companies—and either held them in their portfolios or
securitized and guaranteed them.
Answer True
False
2.12766 points
Question 28
1.
If a credit event such as a default occurred, the CDS buyer will
typically pay the seller the face value of the debt.
Answer True
False
2.12766 points
Question 29
1.
For AIG, the fee for selling protection via the CDS appeared well
worth the risk. For the banks purchasing protection, the CDS enabled them to
neutralize the credit risk and thereby hold less capital against its assets
Answer True
False
2.12766 points
Question 30
1.
“Skin in the game†as used in
the FCIC refers to how much risk exposure financial institutions that pooled
and securitized mortgages retained in the securitized credit.
Answer True
False
2.12766 points
Question 31
1.
AIG Financial Products had a
huge business selling CDS to European banks on a variety of financial assets,
including bonds, mortgage-backed securities, CDOs, and other debt securities.
Answer True
False
2.12766 points
Question 32
1.
Buying CDS on the AA rated tranches of CDOs is more costly than on
the BB rated tranches because the BB rated tranches are riskier.
Answer True
False
2.12766 points
Question 33
1.
Securitization
eliminates credit and interest rate from the financial system. This is one of
the great benefits of securitization.
Answer True
False
2.12766 points
Question 34
1.
Commercial
Banks originate loans but do not securitize them. Commercial banks are required
to fund the loans on their balance sheets. Investment banks can securitize the
loans they buy from investment banks.
Answer True
False
2.12766 points
Question 35
1.
Securitization
of mortgages enabled various dimensions of risks embedded in pools of mortgages
to be distributed to investors who have varying degrees of tolerance for
credit and interest rate risk and who have differing expectations about
the future path of economic valuables. Before securitization was a mainstream
financing technique the bank that originated a pool of mortgages tended to be
the financier of these loans until the loan was paid off. This meant that all
of the risks embedded in the mortgage pool remained on the balance sheets of
the originating bank.
Answer True
False
2.12766 points
Question 36
1.
When
the housing bubble popped and crisis followed, derivatives were in the center
of the storm. AIG, which had not been required to put aside capital reserves as
a cushion for the protection it was selling, was bailed out when it could not
meet its obligations
Answer True
False
2.12766 points
Question 37
1.
Alan Blinder places part of the
blame for the financial crisis on Moody’s but praises Standard and Poor’s. He
argues that Standard and Poor’s never gave AAA ratings to CDOs that were backed
by subprime MBS. Blinder puts the blame on the incompetence of Moody’s
analysts.
Answer True
False
2.12766 points
Question 38
1.
AIG
enters into a contract with Lehman Brothers. AIG is the seller and Lehman is
the buyer. The contract calls for Lehman to pay AIG a periodic fee to Lehman in
exchange for an AIG guarantee. AIGguarantees to buy a portfolio of bonds from Lehman at face value
should the issuer of the bonds default or experience what the contract states
is a default event. This type of contract is:
Answer

An interest rate swap.

A CDS

A call option on the price of
Lehman Brothers common stock.

A CDO

A MBS

2.12766 points
Question 39
1.
Securitization transforms
illiquid financial instruments into liquid securities.
Answer True
False
2.12766 points
Question 40
1.
The
GSEs were at a competitive disadvantage to banks in terms of capital
requirements, diversification constraints and investment restrictions leading
up to the subprime crisis of 2008.
Answer True
False
2.12766 points
Question 41
1.
FNMA and FHLMC were operating with inadequate capital in the years
leading up to the financial crisis. In 2008 just after Lehman failed FNMA
raised significant capital by selling shares to the Chinese government.
Answer True
False
2.12766 points
Question 42
1.
To mitigate the bank/credit
crisis in October of 2008 the FDIC guaranteed:
Answer

Unsecured debt issued before
June 2009, until 2012.

All
bank deposits for five years.

All
bank liabilities for 1 year from the date Lehman Brothers declared
bankruptcy.

All
equity issued by banks before June 2008, until 2013

The guarantee was
unconditional and indefinite.

2.12766 points
Question 43
1.
AIG did not receive any
collateral calls on the CDS it wrote on the super senior tranches of CDOs
because these tranches continued to pay-off investors.
Answer True
False
2.12766 points
Question 44
1.
AIG, played a central role in the financial crisis by issuing
swaps to investors in CDO tranches, promising to reimburse them for any losses
on the tranches in exchange for a stream of premium-like payments. AIG was
rated AAA in 2006. This credit default swap protection made the CDOs much more
attractive to potential investors because they appeared to be virtually risk
free, but it created huge exposures for the credit default swap issuers if
significant losses did occur. Once investors lost faith in the quality of the
protection offered by the CDS the demand for the risky tranches of CDOs fell
off. This depressed the price of the underlying mortgage collateral. As the
price of subprime mortgage collateral dropped the capital positions of
financial institutions that were holding tranches of CDOs fell.
Answer True
False
2.12766 points
Question 45
1.
AIG, played a central role in the financial crisis by issuing
swaps to investors in CDO tranches, promising to reimburse them for any losses
on the tranches in exchange for a stream of premium-like payments. AIG was
rated AAA in 2006. This credit default swap protection made the CDOs much more
attractive to potential investors because they appeared to be virtually risk
free, but it created huge exposures for the credit default swap issuers if
significant losses did occur. Once investors lost faith in the quality of the
protection offered by the CDS the demand for the risky tranches of CDOs fell
off. This depressed the price of the underlying mortgage collateral. As the
price of subprime mortgage collateral dropped the capital positions of
financial institutions that were holding tranches of CDOs fell.
Answer True
False
2.12766 points
Question 46
1.
Credit
default swaps caused the financial crisis.
Answer True
False
2.12766 points
Question 47
1.
The reason the financial crisis of 2007 was so much worse than the
crisis of 1907 was that depositors withdrew money in the fall of 2007 when the
market for asset-backed securities collapsed.
Answer True
False