QUESTION 1

The following quote from the 10-K filed by Bear Stearns and Company for the fiscal year ending November 30, 2007 indicates that the financial services industry values people with the following characteristics: competent, well trained, motivated and disciplined. There is intense competition in the financial services industry for qualified employees. In addition, we face increasing competition with businesses outside the financial services industry, such as hedge funds, private equity funds and venture capital funds, for the most highly skilled individuals. Our business could be adversely affected if we are unable to attract new employees and retain and motivate our existing employees.

True

False

QUESTION 2

A financial institution is permitted to use leverage up to a maximum debt to equity ratio of 20. Currently the bank finances its $ 100 of assets with $10 of equity.

The current debt to equity ratio is 11.

True

False

QUESTION 3

The Federal Reserve designed the Term Securities Lending Facility (TSLF) in March of 2008 so that banks could exchange asset-backed securities for U.S. Treasury bonds. This gave banks more liquid and more certain collateral that they could use in REPO transactions.

True

False

QUESTION 4

In the 10-K filed by Bear Stearns and Company for the fiscal year ending November 30, 2007, management indicates that the companys cost of capital is lined to the long and short term credit ratings of the company.

True

False

QUESTION 5

According to the FCIC report, New Century Financial used the Federal Reserve discount window to raise the capital it needed to finance the origination of mortgages.

True

False

QUESTION 6

A financial institution is permitted to use leverage up to a maximum debt to equity ratio of 20. Currently the bank finances its $ 100 of assets with $10 of equity.

Managers can issue $5 of additional debt and use the proceeds to buy back $5 of equity without violating the debt/equity constraint of 20.

True

False

QUESTION 7

The following statement published in the FCIC by Ralph Cioffi implies that he had more confidence the rating agencies than the overall market.

The thesis behind the fund was that the structured credit markets offered yield over and above what their ratings suggested they should offer.

True

False

QUESTION 8

We learn from Gary Gortons book that asset-backed securities created by means of the securitization process were used as collateral for short term borrowing.

True

False

QUESTION 9

In the 10-K filed by Bear Stearns and Company for the fiscal year ending November 30, 2007,management fails to mention the civil suits filed against BSAM stemming from the failure of the High Grade and the Enhanced Leverage hedge funds.

True

False

QUESTION 10

According to Gorton the crisis of 2007-2009 was unique in the history f the United States since it was the first financial crisis lied to the collapse of real estate values.

True

False

QUESTION 11

New Century Financial relied heavily on the REPO market for funds used to originate mortgages.

True

False

QUESTION 12

We learn from Gortons book that banks in August 2007 went right to the Federal Reserve discount window to replace other sources of liquidity that were becoming scarcer. In addition managers of the bank made public announcements that they were using the discount window.

True

False

QUESTION 13

The risk of depending on short term capital from repurchase agreements is that this financing must be rolled over frequently. If the financing cant be rolled and there is no source of new equity financing the borrower will likely default.

True

False

QUESTION 14

The brand of Bear Stearns was not damaged by the actions of Ralph Cioffi and Matthew Tanin because bankers were not convicted of criminal charges.

True

False

QUESTION 15

A financial institution is permitted to use leverage up to a maximum debt to equity ratio of 20. Currently the bank finances its $ 100 of assets with $10 of equity.

Managers will likely receive a margin call if asset value falls to 95.

True

False

QUESTION 16

In the 10-K filed by Bear Stearns and Company for the fiscal year ending November 30, 2007, management indicates that the firms reputation is important to its value.

True

False

QUESTION 17

The brand of Bear Stearns was damaged by Ralph Cioffi and Matthew Tanin because their management decisions led to the collapse of two BSAM hedge funds and a civil case against them by the SEC.

True

False

QUESTION 18

A financial institution is permitted to use leverage up to a maximum debt to equity ratio of 20. Currently the bank finances its $ 100 of assets with $10 of equity.

Managers will likely receive a margin call if asset value falls to 96.

True

False

QUESTION 19

In the 10-K filed by Bear Stearns and Company for the fiscal year ending November 30, 2007, management indicates that credit ratings are a function of many factors including the amount of leverage the firm uses.

True

False

QUESTION 20

Gorton implies in the last paragraph of chapter 4 that the asset-backed securities backing short term debt were much less liquid than lenders had believed prior to the collapse of the subprime market

True

False