Chapter S Current Multinational Financial Challenges: The Credit Crisis of 2007-200 Multiple Choices 5.1 The Seeds of Crisis: Sub-Prime Debt 1) Investment banks and stock brokerages have traditionally been regulated by he A) Federal Reserve System (FED). B) Federal Deposit Insurance Corporation (FDIC). C) Securities and Exchange Commission (SEC). D) Internal Revenue Service (IRS). 2) 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 3) 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. 5.2 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt 1) The process of turning an illiquid asset into a liquid saleable asset is called A) swapping B) wrapping C) securitization D) creationism 2) Asset-backed securities (ASBS) may be securitized based on A) auto loans B) home-equity loans C) credit card receivables D) all of the above is a financial intermediation device that allowed the participant to borrow 3) A short and lend long. A) sub-prime loan B) structured investment vehicle C) non-conforming loan D) all of the above 4) 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 (MIBS) C) credit default swap (CDS) D) collateralized debt obligation (CDO) 5) Which of the following statements concerning eredit 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 Jeast 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. 6) 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 5.3 The Fallout: The Crisis of 2007 and 2008 1) 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. 2) 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 3) The typical TED spread, the difference between the LIBOR and the interest rate swap index, is typically about A) 350 B) 180 C) 120 D) 80 basis points. A The Remedy: Prescriptions for an Infected Global Financial Organism 1) Portfolio theory relies on combining assets with to reduce risk. A) highly positive B) low C) zero D) none of the above return correlation exclusively 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 5.1 The Seeds of Crisis: Sub-Prime Debt 1) Mortgage loans in the U.S. are classified by risk into one prime. three types: prime, alt-A, and sub- 2) Alt-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. 4) The authors make it clear that the main source of market failure with collateralized debt obligations lay almost exclusively with the rating agencies. 5) Credit Default Swaps are highly regulated financial instruments as a result of the Commodity Futures Modernization Act of 2000. 5.3 The Fallout: The Crisis of 2007 and 2008 1) Bear-Stearns is the largest single bankruptey in U.S. history. 2) The international credit crisis began in full force in September 2008. 3) Near the end of the U.S. housing boom many of the mortgages classified as Alt-A were in fact sub-prime. 4) LIBOR stand for the London Interbank Offered Rate, 5.4 The Remedy: Prescriptions for an Infected Global Financial Organism 1) The authors conclude the chapter with a specific road map for future financial regulation. 2) Baring the (hopefully temporary setback of 2008) capital is more mobile today than ever before. 3) Securitization is likely to be declared illegal in the U.S. though it may still exist elsewhere in the world