Academy for Practical Nursing and Health Occupations Financial Crisis Article Questions A very helpful resource is the website: www.investopedia.com, which is a Forbes-
linked company. It is relatively well-written, accurate, and it is FREE. Use information found on www.investopedia.com to answer the questions in this
section. There is an article about the financial
crisis by Mark Brunnermeier at Princeton University. This is a dense article so
I don’t expect you to understand all of the issues he discusses, but it is the best
nontechnical article I have been able to find on the crisis. You should provide
brief answers to the following questions after reading the Brunnermeier article. 1 Basic Concepts
A very helpful resource is the website: www.investopedia.com, which is a Forbes-linked company. It is
relatively well-written, accurate, and it is FREE. Use
information found on www.investopedia.com to answer the questions in this
section.
1. Read the tutorial “How to Read a Stock Table.” After reading that section,
select a stock from the newspaper or internet and interpret the information
provided.
2. What is a preferred stock? Common stock? Redeemable stock?
3. Read the tutorial “Buying on margin” and the margin call. Briefly discuss
what these terms mean and discuss the advantages and disadvantages of
buying on margin. Remember buying on margin is a form of leverage
financing.
4. Provide a basic definition of a structured investment vehicle (SIV) and a
conduit. Are these arrangements o↵ balance sheet? Explain
5. This website has a case study on the collapse of Lehman Brothers. Prove
a two paragraph summary of the case study.
6. What is a monoline insurer?
7. Briefly explain what Unit Investment Trusts are.
8. Briefly define currency carry trade. Find an article discussing currency
carry trade and briefly describe it.
9. Define re-hypothecation.
10. What is a financial haircut and how is it related to the loan to value ratio?
11. What is the VIX-CBOE Volatility Index? Provide a one month chart of
the VIX.
12. What is a margin account?
13. What is a custodian bank?
14. What are prime brokers?
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The Financial Crisis
In the homework folder on Blackboard there is an article about the financial
crisis by Mark Brunnermeier at Princeton University. This is a dense article so
I don’t expect you to understand all of the issues he discusses, but it is the best
nontechnical article I have been able to find on the crisis. You should provide
brief answers to the following questions after reading the Brunnermeier article.
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1. In the lecture notes “Risk, Return and Leverage” there is a section on
securitization and slicing up a portfolio or “tranching.” Use this example
to illustrate the “super senior tranche” and the “equity tranche” or “toxic
waste” tranche as defined by Brunnermeier. How are credit default swaps
(CDS) used for insurance in the securitization process?
2. What is the CDX for CDS in the US?
3. What is a liquidity backstop and how is it related to your earlier answer
for SIVs and conduits?
4. How did the use of short term repos worsen the maturity mismatch of
investment banks?
5. On page 80, Brunnermeier discusses regulatory and ratings arbitrage. Explain how the use of o↵-balance sheet vehicles allowed banks to reduce the
amount of capital they needed under the Basel Accord I.
6. Figure 1 illustrates the credit default swap ABX index. Briefly describe
the information contained in this figure.
7. Figure 2 illustrates the relationship between two types of commercial paper. Provide a brief description of the two types and what this figure
illustrates.
8. The TED spread is defined on page 85 and illustrated in Figure 3. What
is this spread and what does it indicate? Go to the FRED data set on
the Federal Reserve Bank of St. Louis to provide a recent graph of the
the TED spread. How does it compare with the TED spread illustrated
in Figure 3?
9. Brunnermeier describes the various programs implemented by the Federal Reserve during the financial crisis. Go to the website of the Federal
Reserve Bank of New York and find the “Program Archives.” Use the
information on this web site to define the following terms:
(a) Term Securities lending facility
(b) Commercial paper funding facility
(c) Money Market Investor funding facility
(d) Primary dealer credit facility
(e) List of primary dealers
Describe the facility, the market and the goals, e.g. liquidity, of each
facility (go to the FAQs section). Write no more than a paragraph on
each, using the NY Fed’s website and the Brunnermeier article.
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Internet Topics
Provide the article title and author (if available) for any article you read. Remember the aim of this assignment is to acquaint you with some sources of
information available on the Internet.
1. Federal Reserve’s Balance Sheet: Go to
www.federalreserve.gov/releases/h41/current/h41.pdf
to see a recent balance sheet statement for the Federal Reserve System.
(a) Discuss the various components of the balance sheet, linking the balance sheet to the various facilities discussed in the previous question.
In a paragraph, discuss the moral hazard problems that may arise
and discuss the problems with the quality of the collateral. What
kind of risk is the Federal Reserve potentially taking on?
(b) What are the repurchase agreements on the asset side?
(c) What is Maiden Lane LLC? You will need to look at table 2.
(d) On the liabilities side, what are reverse repurchase agreements?
(e) What fraction of total assets is currency in circulation?
(f) What fraction of total assets is reserves?
(g) Look at the H.4.1 for December 2006 and December 2011. Discuss
the di↵erences among the balance sheets for December 2016, 2011
and January 2019.
(h) The Federal Reserve has been pursuing a policy of quantitative easing. Describe the impact of quantitative easing on the Federal Reserve’s balance sheet.
2. Exchange-Traded Funds (ETFS) have become very popular in the last 3-5
years. How do ETFs and standard mutual funds di↵er? (Hint: in the
intra day trading). A suggested web site is
http://www.investopedia.com/articles/mutualfund/05/060605.asp
3. Private equity markets have grown rapidly. Provide an overview of the
private equity market, including a discussion of the advantages and disadvantages. There is a paper “The Economics of the Private Equity Market”
by Stephen D. Prowse at the Federal Reserve Bank of Dallas that provides
a nice overview. You are also welcome to look at other web sites, including Wikipedia. Answer the following questions: what is the private equity
market and how does it di↵erent from the standard equity market? What
types of firms raise funds through the private equity market? Is it cheaper
to raise funds through a standard equity market or the private equity
market? What kind of borrowers does this market attract? How does
asymmetric information enter into the story? Which firms are the main
participants in the private equity market?
You should write about a page (typed) on this topic.
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4. Contingent convertible bonds (COCOS) have recently been in the news.
Describe a COCO. I recommend going to the Investopedia website.
5. The Treasury has started to issue Treasury Inflation Protected bonds
(TIPS). Go to the Investopedia web site or else CNN (look in the business
section) to find a primer on TIPS. Provide a summary of what TIPS are,
how they are structured (such as what price index is used), and other
basic information about the bond.
6. The “Shadow Banking System” is defined as hedge funds, conduits, SIV,
money funds, monoline insurers, and investment banks. One explanation
for why the financial crisis of the past year was so dramatic is that there
was a “bank run” on the shadow banking system. Provide a two paragraph
description of what a bank run means for the institutions in this list of
“shadow banks.”
7. There is been tremendous innovation in financial instruments that make
it easier to trade credit risk. The issuance of asset backed securities
(ABS), collateralized debt obligations (CDO), collateralized loan obligations (CLO) and credit default swaps (CDS) have expanded on a dramatic
scale between 2005 to 2007. The composition of the underlying assets
shifted to higher credit risk mortgages and loans issued by non-investment
grade companies. Briefly describe each category of credit risk instrument
(ABS,CDO, CLO, CDS). The Investopedia website, or the Federal Reserve
Bank of New York website, or www.bloomberg.com will be useful.
8. There has been a huge number of recent articles about negative interest
rates and monetary policy. Find an article on a reputable website (if you
are uncertain please ask me) describing what negative interest rates mean
and how they might impact monetary policy. There is no right or wrong
answer because we don’t really know.
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