Financial Crisis Review

Community Reinvestment Act

A United States federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. Also put in place to reduce discriminatory credit practices against low-income neighborhoods.

TARP(Toxic/Troubled Asset Relief Program)

A group of programs created and run by the U.S. Treasury to stabilize the country's financial system, restore economic growth and prevent foreclosures in the wake of the 2008 financial crisis through purchasing troubled companies' assets and equity. The Troubled Asset Relief Program initially gave the Treasury purchasing power of $700 billion to buy illiquid mortgage-backed securities and other assets from key institutions in an attempt to restore liquidity to the money markets. The fund was created on October 3, 2008 with the passage of the Emergency Economic Stabilization Act. The Dodd-Frank Act later reduced the $700 billion authorization to $475 billion.

CDS'(Credit Default Swap)

A swap designed to transfer the credit exposure of fixed income products between parties. A credit default swap is also referred to as a credit derivative contract, where the purchaser of the swap makes payments up until the maturity date of a contract. Payments are made to the seller of the swap. In return, the seller agrees to pay off a third party debt if this party defaults on the loan. A CDS is considered insurance against non-payment. A buyer of a CDS might be speculating on the possibility that the third party will indeed default. Removed risk from a banks investment. Primary reason AIG failed.

MBS'(Mortgage Backed Securities)

A type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by a accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from a regulated and authorized financial institution.

ARM's(Adjustable Rate Mortgages)

A type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin.

Glass-Steagall Act

An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment banking business. The Glass-Steagall Act was sponsored by Senator Carter Glass, a former Treasury secretary, and Senator Henry Steagall, a member of the House of Representatives and chairman of the House Banking and Currency Committee. The Act was passed as an emergency measure to counter the failure of almost 5,000 banks during the Great Depression. The Glass-Steagall lost its potency in subsequent decades and was finally repealed in 1999. prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities, protected bank depositors from the additional risks associated with security transactions, repealed in 1999

Bear Stearns

Bear Stearns Global investment bank, securities trading, and brokerage firm. During the 2008 Financial Crisis, first large financial institution to collapse,JP Morgan acquired them.

Differences between Lehman & Bear Stearns

Bear was bailed out by the federal government and then linked with JP Morgan/Chase. Lehman tried to find someone to buy them out(Korea Bank, Barclays) and the government would not help them. Lehman was left to fail.

Greece

Causes of Crisis: Practices of Greed: - No tax collection - Bribery - Welfare State = Free college, early retirement - Public Sector outweighs private Solutions:

Iceland

Causes of Crisis: - People saw profit in investment banking so they left fishing and went into it with no experience - Major Industries: - Financial - Fishing Major Creditors: - Germany - Great Britain

Bernanke

Chairman of the Federal Reserve '06-, chairman of the U.S. President's Council of Economic Advisors prior to being nominated as Greenspan's successor in late 2005,

NINA Loans(No income No asset)

DEFINITION of 'No Income / No Asset Mortgage - NINA' A type of reduced documentation mortgage program in which no income and no assets are disclosed on the loan application, but employment is verified. NINA loans usually fall into the Alt-A classification, and may carry a higher interest rate than a prime mortgage. The only thing the loan required was proof of employment.

Fannie Mae & Freddie Mac

Federal National Mortgage Association; also a government -sponsored enterprise. Its purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities, allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing reliance on thrifts, An acronym of the Federal Home Loan Mortgage Corporation, a public government -sponsored enterprise. Created in 1970 to expand the secondary market for mortgages in the US

Greenspan

Federal Reserve Chairman ('87-'06), brought super low interest rates - part of causes

Greenspan's Interest Rates

Kept interest rates very low which eventually helped contribute to the crisis, it made the dollar very weak.

Ratings Agencies Practices

Packaged sub prime mortgages with good mortgages and gave them triple A ratings. Then banks sold them off and traded them causing massive problems.

27%/20% down rules

Putting at least 20% down on a home ensures that the buyer actually puts an investment of their own money into it. Nobody wants to default on payments when they have a lot of their own money in the home. Should not spend more than 27% of you income on a monthly mortgage payment.

Paulson

Secretary of Treasury under GW Bush, involved in several different multi-billion bailout packages, worked for Goldman Sachs, has been criticized for being slow to respond to the crisis, and introducing greater uncertainty into the financial markets by letting Lehman Brothers fail.

Geithner

Secretary of Treasury under Obama, NY Fed Chair, arranged rescue and sale of Bear Stearns, supported AIG from bankruptcy, repeatedly raised concerns about the failure of banks to understand their risks, including those taken through derivatives, he and the Federal Reserve system did not act with enough force to blunt the troubles that ensued. That was largely because he and other regulators relied too much on assurances from senior banking executives that their firms were safe and sound.

Systemic Risk

The possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy. Systemic risk was a major contributor to the financial crisis of 2008. Companies considered a systemic risk are called "too big to fail." These institutions are very large relative to their respective industries or make up a significant part of the overall economy. A company that is highly interconnected with others is also a source of systemic risk. Systemic risk should not be confused with systematic risk.

Moral Hazard

The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.

Lehman Brothers

Went bankrupt, could not find any buyers, tried to get barclays and bank of korea, gov would not bail them out, their failure hurt the economy, they failed because they were invested to heavily in

AIG

a multinational insurance corporation, major player involved in CDS, US government offered bailout