Describe the model of firm equity as a call option on assets of the firm. What does it mean for this option to be out-the-money?

Why were many thrifts insolvent by the early 1980s?

Using the equity model in A, and the concept of forbearance, describe and explain the behavior of thrifts, both insolvent and solvent, in the early 1980s.

How does securitization help mitigate the problem described in B?

Describe how securitization eventually played a role in the creation of the RE bubble of the early- to mid-2000s.