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1. Following the dotcom implosion and 2000 market crash, the Federal Reserve lowered rates to 2% for 3 years, including a then unprecedented level of 1% for more than a year. Discuss the impact this has on various asset classes, including Real Estate, Fixed Income, Oil and Gold. What difference might a more traditional interest rate regime have made for these assets?
Bonus Question: Imagine you were FOMC Chair. Where would you have set rates in the 1990s? After the 2000 crash? Today?
2. The rating agencies (NRSROs) — Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings — business models was once funded by bond investors,who bought the NRSRO research. This changed in the 1990s to a Syndicators & Underwriter funded model. How did this change impact the performance of ratings agencies?
Bonus question: Does the financial world still require NRSROs? What potential alternatives might replace these entities in evaluating complex financial products.
3. The Commodity Futures Modernization Act of 2000 was an unusual piece of deregulatory legislation, creating a new world of uniquely self-regulated financial instruments — the derivative. What was the impact of this on risk management, leverage, and mortgage underwriting?
Bonus: What did the lack of reserve requirements for derivatives mean for firms such as AIG, Bear Stearns and Lehman Brothers?
4. More than 50% of subprime loans were made by nonbank mortgage underwriters not subject to comprehensive federal supervision; another 30% were made by banks or thrifts also not subject to routine supervision or examinations. What did this do to the supply/demand curve in the housing and mortgage markets?
Bonus: What is the role of changing credit standards in prior bubbles and financial crises?
5. In 2004, the SEC issued :”the Bear Stearns exemption” — they changed the Net Capitalization rule from 12 to 1 leverage to essentially unlimited for Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. None of these companies exist today in the same structure as prior to the rule change. Discuss the impact of this rule change on these companies.
Bonus: Changing broad legislation for only 5 companies is unusual. What does this say about regulatory capture, democracy and the impact of lobbying on American society?
6A. Mortgage underwriting standards changed rapidly in the 2000s. Many lenders stopped verifying income, payment history, credit scores.
6B. The loans themselves changed: Loan to value (LTV) went from 80% (20% down payment) to 100% (No Money Down) to even 120% (Piggyback mortgages).
6C. “Innovative” new mortgage products were developed and marketed in the 2000s: 2/28 ARMs, I/O s, Neg Ams
Discuss the correlation this had on a) home prices; b) new inventory build; and c) foreclosures.
7. Banks developed automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible. What was the impact of this on Housing prices, defaults and foreclosures?
Bonus: Real estate agents and mortgage brokers were known to repeatedly use the same corrupt appraisers to facilitate loans approval. Did this correlate with AU? Discuss how.
8. Collateralized debt obligation (CDO/CMOs) managers who created trillions of dollars in mortgage backed securities and the institutional investors (pensions, insurance firms, banks, etc.) who purchased these appear to have failed to engage in effective due diligence prior to the purchases of these products. Reconcile this in terms of the Efficient Market Hypothesis
Bonus: What does this mean for self regulation of the financial industry?
9. The Depression era Glass Steagall legislation was repealed in 1998. What impact did this have on the size of banking institutions? What did this do to the competitive landscape of financial services industry? Did this impact bank risk taking? Discuss.
10. Numerous states had anti-predatory lending laws which were in 2005 “Fedrally Pre-empted” by order of John Dugan, head of the Office of the Comptroller of the Currency (OCC). What impact did this have on states with anti-predatory lending laws default and foreclosure levels, pre and post pre-emption?
11. In 2006, more than 84% of subprime mortgages were issued by private lending institutions not covered by government regulations (McClatchy). Discuss what this means in terms of profit motive, government policy, and GSEs.
12. The Bank Bailouts “rescued” the system, but may have created additional issues in the future. Discuss the Moral Hazard of bailouts, what they mean in terms of competitive landscape and concentration of assets in the financial services industry.
Bonus: What impact might the Consumer Financial Protection Bureau on lending and future credit bubbles?
It seems fairly plain that self-regulating markets do not work because of excessive human greed.