Chapter 5

54 The Remedy: Prescriptions for an infected Global Financial Organism 1) 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 2) 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. 3) 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 True/False 5./ The Seeds of Crisis: Sub-Prime Debt TD Mortgage loans in the U.S. are classified by risk into one of three types: prime, alt-A, and sub- prime. 2) All-A mortgage loans are NOT eligible for sale to GSEs such as Fannie Mae or Freddie Mac. 3) The 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. 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt 1) 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. 2) It is pretty clear after reading this chapter that securitization in and of itself is a poor financial idea. 3) 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