One of the most discussed topics in finance recently is the global economic crisis that is said to have begun in the $2000$ s$.$ Your professor instructed

your team to write an article for the college newspaper. Your friend has written the first draft of the article, which captures the essence of the global

economic crisis. She has left some important points for you to review and has asked you to check the summary.

THE GLOBAL ECONOMIC CRISIS

Mortgage originators issued mortgages to home buyers and sold these mortgages to securitizing firms. These firms bundled these

mortgages into pools and created securities that were backed by the mortgage payments. A portion of these pools were called

tranches. Groups of tranches were further combined and then divided again into more complex securities called collateralized debt

obligations $($CDOs$).$ These securities were redivided and recombined to create even more complex securities called CDOs$-$squared.

This process had important implications: $(1)$ The total risk embedded in the mortgages did not change; $(2)$ since the risk was spread

amongst several CDOs, it was difficult to assess the risk in each CDO; and $(3)$ during the process of securitization and resecuritization,

financial institutions earned fees and were thus encouraged to continue this process.

Summary

Which statements belong in the summary? Check all that apply.

Rating agencies, such as Moody's and Standard & Poor's, earned fees from securitizing agencies for providing ratings for CDOs. The

securitizing agencies were looking for higher ratings for their CDOs, and the rating agencies were earning fees. This led to a conflict of

interest; thus, ratings did not reflect the true risk involved in the CDOs, which were backed by mortgages.

Borrowers who met certain requirements for mortgages, such as minimum income level relative to the total mortgage amount, could

obtain mortgages that were qualified to be securitized$.$ Such mortgages were called subprime, or Alt$-$A$,$ mortgages.

Mortgage payments based on short$-$term interest rates$-$called adjustable$-$rate mortgages $($ARMs$)-$were preferred by subprime

borrowers.

The total amount of risk embedded in the securities created by bundling mortgages did not change. The securitization and resecuritization

processes led to a distribution of total risk among different types of collateralized securities$.$

Factors that caused the financial crisis

Analysts and theorists have debated over the different factors that caused the subprime mortgage meltdown. According to your understanding of the

crisis, which of the following factors led to the financial crisis? Check all that apply.

Regulations were relaxed, leading to nonqualifying mortgages getting approved for loans.

Real estate appraisers and rating agencies were lax.

Mortgage brokers did not verify borrowers carefully.

Credit default swaps claimed to insure CDOs.