Question: Who is the investment bank that was feared to collapse in March 2008 and was sold in a fire-sale to JP Morgan Chase?

Answer: Bear Stearns

and other stimulative measures in the Economic Stimulus Act of 2008. In March 2008, Bear Stearns, a major US investment bank heavily invested in subprime mortgage derivatives, began to go under. Rumors of low cash reserves dragged Bear's stock price down while lenders to Bear began to withdraw their cash. The Federal Reserve funneled an emergency loan to Bear through JP Morgan Chase. (As an investment bank, Bear could not borrow from the Fed but JP Morgan Chase, a commercial bank, could). The Fed ended up brokering an agreement for the sale of Bear to JP Morgan Chase that took


Question: When did the financial institution crisis hit its peak?

Answer: September and October 2008

involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial, as they could no longer obtain financing through the credit markets. Over 100 mortgage lenders went bankrupt during 2007 and 2008. Concerns that investment bank Bear Stearns would collapse in March 2008 resulted in its fire-sale to JP Morgan Chase. The financial institution crisis hit its peak in September and October 2008. Several major institutions either failed, were acquired under duress, or were subject to government takeover. These included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, Citigroup, and AIG. On October 6,


Question: What firm filed the largest bankruptcy in U.S. history?

Answer: Lehman Brothers

2008, three weeks after Lehman Brothers filed the largest bankruptcy in US history, Lehman's former CEO Richard S. Fuld Jr. found himself before Representative Henry A. Waxman, the California Democrat who chaired the House Committee on Oversight and Government Reform. Fuld said he was a victim of the collapse, blaming a "crisis of confidence" in the markets for dooming his firm. In September 2008, the crisis hit its most critical stage. There was the equivalent of a bank run on the money market funds, which frequently invest in commercial paper issued by corporations to fund their operations and payrolls. Withdrawal


Question: What do money market funds frequently invest in?

Answer: commercial paper issued by corporations

2008, three weeks after Lehman Brothers filed the largest bankruptcy in US history, Lehman's former CEO Richard S. Fuld Jr. found himself before Representative Henry A. Waxman, the California Democrat who chaired the House Committee on Oversight and Government Reform. Fuld said he was a victim of the collapse, blaming a "crisis of confidence" in the markets for dooming his firm. In September 2008, the crisis hit its most critical stage. There was the equivalent of a bank run on the money market funds, which frequently invest in commercial paper issued by corporations to fund their operations and payrolls. Withdrawal


Question: When did the financial crisis hit its most critical stage?

Answer: September 2008

2008, three weeks after Lehman Brothers filed the largest bankruptcy in US history, Lehman's former CEO Richard S. Fuld Jr. found himself before Representative Henry A. Waxman, the California Democrat who chaired the House Committee on Oversight and Government Reform. Fuld said he was a victim of the collapse, blaming a "crisis of confidence" in the markets for dooming his firm. In September 2008, the crisis hit its most critical stage. There was the equivalent of a bank run on the money market funds, which frequently invest in commercial paper issued by corporations to fund their operations and payrolls. Withdrawal


Question: How much was withdrawn from money markets during one week in September 2008?

Answer: $144.5 billion

from money markets were $144.5 billion during one week, versus $7.1 billion the week prior. This interrupted the ability of corporations to rollover (replace) their short-term debt. The US government responded by extending insurance for money market accounts analogous to bank deposit insurance via a temporary guarantee and with Federal Reserve programs to purchase commercial paper. The TED spread, an indicator of perceived credit risk in the general economy, spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008, reaching a record 4.65% on October 10, 2008. In a dramatic meeting on September


Question: What was the record high for the TED spread on October 10, 2008?

Answer: 4.65%

from money markets were $144.5 billion during one week, versus $7.1 billion the week prior. This interrupted the ability of corporations to rollover (replace) their short-term debt. The US government responded by extending insurance for money market accounts analogous to bank deposit insurance via a temporary guarantee and with Federal Reserve programs to purchase commercial paper. The TED spread, an indicator of perceived credit risk in the general economy, spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008, reaching a record 4.65% on October 10, 2008. In a dramatic meeting on September


Question: What is the system with nearly equal the importance of traditional commercial banking?

Answer: shadow banking system

18, 2008, Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke met with key legislators to propose a $700 billion emergency bailout. Bernanke reportedly told them: "If we don't do this, we may not have an economy on Monday." The Emergency Economic Stabilization Act, which implemented the Troubled Asset Relief Program (TARP), was signed into law by President George W. Bush on October 3, 2008. Economist Paul Krugman and US Treasury Secretary Timothy Geithner explain the credit crisis via the implosion of the shadow banking system, which had grown to nearly equal the importance of the traditional commercial banking sector


Question: The shadow banking system could not provide funds to mortgage firms and other corporations without the ability to obtain which funds?

Answer: investor funds

as described above. Without the ability to obtain investor funds in exchange for most types of mortgage-backed securities or asset-backed commercial paper, investment banks and other entities in the shadow banking system could not provide funds to mortgage firms and other corporations. This meant that nearly one-third of the US lending mechanism was frozen and continued to be frozen into June 2009. According to the Brookings Institution, at that time the traditional banking system did not have the capital to close this gap: "It would take a number of years of strong profits to generate sufficient capital to support that


Question: How much of the U.S. lending mechanism was frozen until June 2009?

Answer: nearly one-third

as described above. Without the ability to obtain investor funds in exchange for most types of mortgage-backed securities or asset-backed commercial paper, investment banks and other entities in the shadow banking system could not provide funds to mortgage firms and other corporations. This meant that nearly one-third of the US lending mechanism was frozen and continued to be frozen into June 2009. According to the Brookings Institution, at that time the traditional banking system did not have the capital to close this gap: "It would take a number of years of strong profits to generate sufficient capital to support that


Question: What is the primary cause of the reduction in funds available for borrowing?

Answer: the collapse of the shadow banking system

additional lending volume." The authors also indicate that some forms of securitization were "likely to vanish forever, having been an artifact of excessively loose credit conditions." While traditional banks raised their lending standards, it was the collapse of the shadow banking system that was the primary cause of the reduction in funds available for borrowing. There is a direct relationship between declines in wealth and declines in consumption and business investment, which along with government spending, represent the economic engine. Between June 2007 and November 2008, Americans lost an estimated average of more than a quarter of their collective net


Question: What institution reported that the traditional banking systems does not have the capital to close the gap in the lending mechanism?

Answer: Brookings Institution

as described above. Without the ability to obtain investor funds in exchange for most types of mortgage-backed securities or asset-backed commercial paper, investment banks and other entities in the shadow banking system could not provide funds to mortgage firms and other corporations. This meant that nearly one-third of the US lending mechanism was frozen and continued to be frozen into June 2009. According to the Brookings Institution, at that time the traditional banking system did not have the capital to close this gap: "It would take a number of years of strong profits to generate sufficient capital to support that


Question: What is likely to vanish forever, as a result of excessively loose credit conditions?

Answer: some forms of securitization

years of strong profits to generate sufficient capital to support that additional lending volume." The authors also indicate that some forms of securitization are "likely to vanish forever, having been an artifact of excessively loose credit conditions." Economist Gary Gorton wrote in May 2009: Unlike the historical banking panics of the 19th and early 20th centuries, the current banking panic is a wholesale panic, not a retail panic. In the earlier episodes, depositors ran to their banks and demanded cash in exchange for their checking accounts. Unable to meet those demands, the banking system became insolvent. The current panic involved


Question: As of June 2009, the Brookings Institution reports that traditional banking system does not have enough of what to close the lending gap?

Answer: capital

the "core of what happened" to cause the crisis. He referred to this lack of controls as "malign neglect" and argued that regulation should have been imposed on all banking-like activity. The securitization markets supported by the shadow banking system started to close down in the spring of 2007 and nearly shut-down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of funds. According to the Brookings Institution, the traditional banking system does not have the capital to close this gap as of June 2009: "It would take a


Question: How much net worth did Americans lose between June 2007 and November 2008?

Answer: more than a quarter

Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009. These losses were expected to top $2.8 trillion from 2007 to 2010. U.S. banks losses were forecast to hit $1 trillion and European bank losses will reach $1.6 trillion. The IMF estimated that U.S. banks were about 60 percent through their losses, but British and eurozone banks only 40 percent. Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. By early November 2008, a broad U.S. stock


Question: In November 2008, how much had housing prices drop from their 2006 peak?

Answer: 20%

worth. By early November 2008, a broad US stock index, the S&P 500, was down 45% from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30–35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. Total retirement assets, Americans' second-largest household asset, dropped by 22%, from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement


Question: How much was home equity valued in the United States at its peak in 2006?

Answer: $13 trillion

index, the S&P 500, was down 45 percent from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30–35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. Total retirement assets, Americans' second-largest household asset, dropped by 22 percent, from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement savings) lost $1.2 trillion and pension assets


Question: How much was home equity valued in the United States in mid-2008?

Answer: $8.8 trillion

worth. By early November 2008, a broad US stock index, the S&P 500, was down 45% from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30–35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. Total retirement assets, Americans' second-largest household asset, dropped by 22%, from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement


Question: According to economist Dean Baker, a homeowner who has no equity if this type default risk?

Answer: serious

additional cuts in discretionary spending that would cause a loss of four million more jobs. The Center for Budget and Policy Priorities published a report in 2014 saying that a constitutional balanced budget amendment would pose serious risks. The amendment has been called "political posturing" because its proponents use it to position themselves as supporters of a balanced budget but without specifying which unpopular tax increases or spending cuts they would support to reach that goal. For example, Robert Bixby of the anti-deficit Concord Coalition called the amendment "an avoidance device." Economist Dean Baker has noted that if the federal


Question: What investment bank stated on October 6 that 2008 would see a global recession lasting for at least two years?

Answer: UBS

to seek aid from the International Monetary Fund. Several commentators have suggested that if the liquidity crisis continues, an extended recession or worse could occur. The continuing development of the crisis had prompted fears of an impending global economic collapse. The financial crisis is likely to yield the biggest banking shakeout since the savings-and-loan meltdown. Investment bank UBS stated on October 6 that 2008 would see a clear global recession, with recovery unlikely for at least two years. Three days later UBS economists announced that the "beginning of the end" of the crisis had begun, with the world starting to


Question: On October 16, 2008, how long did UBS predict the United States' recession would last?

Answer: three quarters

make the necessary actions to fix the crisis: capital injection by governments; injection made systemically; interest rate cuts to help borrowers. The United Kingdom had started systemic injection, and the world's central banks were now cutting interest rates. UBS emphasized the United States needed to implement systemic injection. UBS further emphasized that this fixes only the financial crisis, but that in economic terms "the worst is still to come". UBS quantified their expected recession durations on October 16: the Eurozone's would last two quarters, the United States' would last three quarters, and the United Kingdom's would last four quarters. The


Question: Relative to the size of its economy, what country's banking collapse was the largest experienced by any country in economic history?

Answer: Iceland

after the Crash. 2008–2011 Icelandic financial crisis The Icelandic financial crisis was a major economic and political event in Iceland that involved the default of all three of the country's major privately owned commercial banks in late 2008, following their difficulties in refinancing their short-term debt and a run on deposits in the Netherlands and the United Kingdom. Relative to the size of its economy, Iceland's systemic banking collapse was the largest experienced by any country in economic history. The crisis led to a severe economic depression in 2008–2010 and significant political unrest. In the years preceding the crisis, three


Question: What was one of the actions taken by government to fix the financial crisis?

Answer: capital injection

make the necessary actions to fix the crisis: capital injection by governments; injection made systemically; interest rate cuts to help borrowers. The United Kingdom had started systemic injection, and the world's central banks were now cutting interest rates. UBS emphasized the United States needed to implement systemic injection. UBS further emphasized that this fixes only the financial crisis, but that in economic terms "the worst is still to come". UBS quantified their expected recession durations on October 16: the Eurozone's would last two quarters, the United States' would last three quarters, and the United Kingdom's would last four quarters. The


Question: According to The Brookings Institution report in June 2009, how much growth did U.S. consumption account for between 2000 and 2007?

Answer: more than a third

economic crisis in Iceland involved all three of the country's major banks. Relative to the size of its economy, Iceland's banking collapse is the largest suffered by any country in economic history. At the end of October UBS revised its outlook downwards: the forthcoming recession would be the worst since the early 1980s recession with negative 2009 growth for the US, Eurozone, UK; very limited recovery in 2010; but not as bad as the Great Depression. The Brookings Institution reported in June 2009 that US consumption accounted for more than a third of the growth in global consumption between 2000


Question: For the first quarter of 2009, what was the annualized rate of decline in GDP in Germany?

Answer: 14.4%

and 2007. "The US economy has been spending too much and borrowing too much for years and the rest of the world depended on the US consumer as a source of global demand." With a recession in the US and the increased savings rate of US consumers, declines in growth elsewhere have been dramatic. For the first quarter of 2009, the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia, 9.8% in the Euro area and 21.5% for Mexico. Some developing countries that had seen strong economic growth saw


Question: For the first quarter of 2009, what was the annualized rate of decline in GDP in Mexico?

Answer: 21.5%

and 2007. "The US economy has been spending too much and borrowing too much for years and the rest of the world depended on the US consumer as a source of global demand." With a recession in the US and the increased savings rate of US consumers, declines in growth elsewhere have been dramatic. For the first quarter of 2009, the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia, 9.8% in the Euro area and 21.5% for Mexico. Some developing countries that had seen strong economic growth saw


Question: Who depended on the U.S. consumer as a source of global demand?

Answer: the rest of the world

and 2007. "The US economy has been spending too much and borrowing too much for years and the rest of the world depended on the US consumer as a source of global demand." With a recession in the US and the increased savings rate of US consumers, declines in growth elsewhere have been dramatic. For the first quarter of 2009, the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia, 9.8% in the Euro area and 21.5% for Mexico. Some developing countries that had seen strong economic growth saw


Question: What is the growth forecast for Cambodia in 2009?

Answer: close to zero

significant slowdowns. For example, growth forecasts in Cambodia show a fall from more than 10% in 2007 to close to zero in 2009, and Kenya may achieve only 3–4% growth in 2009, down from 7% in 2007. According to the research by the Overseas Development Institute, reductions in growth can be attributed to falls in trade, commodity prices, investment and remittances sent from migrant workers (which reached a record $251 billion in 2007, but have fallen in many countries since). This has stark implications and has led to a dramatic rise in the number of households living below the poverty


Question: How much were remittances sent from migrant workers in 2007?

Answer: $251 billion

significant slowdowns. For example, growth forecasts in Cambodia show a fall from more than 10% in 2007 to close to zero in 2009, and Kenya may achieve only 3–4% growth in 2009, down from 7% in 2007. According to the research by the Overseas Development Institute, reductions in growth can be attributed to falls in trade, commodity prices, investment and remittances sent from migrant workers (which reached a record $251 billion in 2007, but have fallen in many countries since). This has stark implications and has led to a dramatic rise in the number of households living below the poverty


Question: What does Bruno Wenn of the German DEG recommend to attract new investors?

Answer: sound economic policymaking and good governance

line, be it 300,000 in Bangladesh or 230,000 in Ghana. Especially states with a fragile political system have to fear that investors from Western states withdraw their money because of the crisis. Bruno Wenn of the German DEG recommends to provide a sound economic policymaking and good governance to attract new investors The World Bank reported in February 2009 that the Arab World was far less severely affected by the credit crunch. With generally good balance of payments positions coming into the crisis or with alternative sources of financing for their large current account deficits, such as remittances, Foreign Direct


Question: According to Overseas Development Institute, what is one reason for the reduction in growth in developing countries?

Answer: falls in trade

significant slowdowns. For example, growth forecasts in Cambodia show a fall from more than 10% in 2007 to close to zero in 2009, and Kenya may achieve only 3–4% growth in 2009, down from 7% in 2007. According to the research by the Overseas Development Institute, reductions in growth can be attributed to falls in trade, commodity prices, investment and remittances sent from migrant workers (which reached a record $251 billion in 2007, but have fallen in many countries since). This has stark implications and has led to a dramatic rise in the number of households living below the poverty


Question: What area of the world was less severely affected by the credit crunch according to The World Bank report In February 2009?

Answer: Arab World

line, be it 300,000 in Bangladesh or 230,000 in Ghana. Especially states with a fragile political system have to fear that investors from Western states withdraw their money because of the crisis. Bruno Wenn of the German DEG recommends to provide a sound economic policymaking and good governance to attract new investors The World Bank reported in February 2009 that the Arab World was far less severely affected by the credit crunch. With generally good balance of payments positions coming into the crisis or with alternative sources of financing for their large current account deficits, such as remittances, Foreign Direct


Question: What does the abbreviation FDI stand for?

Answer: Foreign Direct Investment

purpose is financial gain, whereas in foreign direct investment a firm has control over the operations abroad. So, the traditional theory of investment based on differential interest rates does not explain the motivations for FDI. According to Hymer, there are two main determinants of FDI; where an imperfect market structure is the key element. The first is the firm-specific advantages which are developed at the specific companies home country and, profitably, used in the foreign country. The second determinant is the removal of control where Hymer wrote: "When firms are interconnected, they compete in selling in the same market or


Question: Arab countries entered the financial crisis in exceptionally strong positions giving them a cushion against this?

Answer: global downturn

Investment (FDI) or foreign aid, Arab countries were able to avoid going to the market in the latter part of 2008. This group is in the best position to absorb the economic shocks. They entered the crisis in exceptionally strong positions. This gives them a significant cushion against the global downturn. The greatest effect of the global economic crisis will come in the form of lower oil prices, which remains the single most important determinant of economic performance. Steadily declining oil prices would force them to draw down reserves and cut down on investments. Significantly lower oil prices could cause


Question: What will have the greatest impact on the global economic crisis?

Answer: lower oil prices

Investment (FDI) or foreign aid, Arab countries were able to avoid going to the market in the latter part of 2008. This group is in the best position to absorb the economic shocks. They entered the crisis in exceptionally strong positions. This gives them a significant cushion against the global downturn. The greatest effect of the global economic crisis will come in the form of lower oil prices, which remains the single most important determinant of economic performance. Steadily declining oil prices would force them to draw down reserves and cut down on investments. Significantly lower oil prices could cause


Question: What is the single most important determinant of economic performance?

Answer: oil prices

Investment (FDI) or foreign aid, Arab countries were able to avoid going to the market in the latter part of 2008. This group is in the best position to absorb the economic shocks. They entered the crisis in exceptionally strong positions. This gives them a significant cushion against the global downturn. The greatest effect of the global economic crisis will come in the form of lower oil prices, which remains the single most important determinant of economic performance. Steadily declining oil prices would force them to draw down reserves and cut down on investments. Significantly lower oil prices could cause


Question: What was the U.S. unemployment rate in October 2009?

Answer: 10.1%

Organization (ILO) predicted that at least 20 million jobs will have been lost by the end of 2009 due to the crisis — mostly in "construction, real estate, financial services, and the auto sector" — bringing world unemployment above 200 million for the first time. The number of unemployed people worldwide could increase by more than 50 million in 2009 as the global recession intensifies, the ILO has forecast. In December 2007, the U.S. unemployment rate was 4.9%. By October 2009, the unemployment rate had risen to 10.1%. A broader measure of unemployment (taking into account marginally attached workers, those


Question: What was the average hours per work week in October 2009?

Answer: 33

century it was estimated that the average work week was over 60 hours per week. Today the average hours worked in the U.S. is around 33, with the average man employed full-time for 8.4 hours per work day, and the average woman employed full-time for 7.9 hours per work day. The front runners for lowest average weekly work hours are the Netherlands with 27 hours, and France with 30 hours. At current rates the Netherlands is set to become the first country to reach an average work week under 21 hours. In a 2011 report of 26 OECD countries, Germany


Question: What was the annual rate of decrease for the output of goods and services produced by labor and property in 4Q 2008 and 1Q 2009?

Answer: 6%

a reversal of economic performance as has been the case in past oil shocks. Initial impact will be seen on public finances and employment for foreign workers. The output of goods and services produced by labor and property located in the United States decreased at an annual rate of approximately 6% in the fourth quarter of 2008 and first quarter of 2009, versus activity in the year-ago periods. The US unemployment rate increased to 10.1% by October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours per work week declined to 33, the lowest


Question: The U.E. employment rate was 10.2% in October 2009, which was the highest rate since what year?

Answer: 1983

a reversal of economic performance as has been the case in past oil shocks. Initial impact will be seen on public finances and employment for foreign workers. The output of goods and services produced by labor and property located in the United States decreased at an annual rate of approximately 6% in the fourth quarter of 2008 and first quarter of 2009, versus activity in the year-ago periods. The US unemployment rate increased to 10.1% by October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours per work week declined to 33, the lowest


Question: Critics argue that Basel III doesn't address which problem?

Answer: faulty risk-weightings

regulators introduced Basel III regulations for banks. It increased capital ratios, limits on leverage, narrow definition of capital (to exclude subordinated debt), limit counter-party risk, and new liquidity requirements. Critics argue that Basel III doesn't address the problem of faulty risk-weightings. Major banks suffered losses from AAA-rated created by financial engineering (which creates apparently risk-free assets out of high risk collateral) that required less capital according to Basel II. Lending to AA-rated sovereigns has a risk-weight of zero, thus increasing lending to governments and leading to the next crisis. Johan Norberg argues that regulations (Basel III among others) have indeed


Question: What term describes creating risk-free assets out of high risk collateral?

Answer: financial engineering

regulators introduced Basel III regulations for banks. It increased capital ratios, limits on leverage, narrow definition of capital (to exclude subordinated debt), limit counter-party risk, and new liquidity requirements. Critics argue that Basel III doesn't address the problem of faulty risk-weightings. Major banks suffered losses from AAA-rated created by financial engineering (which creates apparently risk-free assets out of high risk collateral) that required less capital according to Basel II. Lending to AA-rated sovereigns has a risk-weight of zero, thus increasing lending to governments and leading to the next crisis. Johan Norberg argues that regulations (Basel III among others) have indeed


Question: Who argued that regulations led to excessive lending to risky governments?

Answer: Johan Norberg

regulators introduced Basel III regulations for banks. It increased capital ratios, limits on leverage, narrow definition of capital (to exclude subordinated debt), limit counter-party risk, and new liquidity requirements. Critics argue that Basel III doesn't address the problem of faulty risk-weightings. Major banks suffered losses from AAA-rated created by financial engineering (which creates apparently risk-free assets out of high risk collateral) that required less capital according to Basel II. Lending to AA-rated sovereigns has a risk-weight of zero, thus increasing lending to governments and leading to the next crisis. Johan Norberg argues that regulations (Basel III among others) have indeed


Question: What was increased by Basel III regulations?

Answer: capital ratios

regulators introduced Basel III regulations for banks. It increased capital ratios, limits on leverage, narrow definition of capital (to exclude subordinated debt), limit counter-party risk, and new liquidity requirements. Critics argue that Basel III doesn't address the problem of faulty risk-weightings. Major banks suffered losses from AAA-rated created by financial engineering (which creates apparently risk-free assets out of high risk collateral) that required less capital according to Basel II. Lending to AA-rated sovereigns has a risk-weight of zero, thus increasing lending to governments and leading to the next crisis. Johan Norberg argues that regulations (Basel III among others) have indeed


Question: When did the U.S. recession that began in December 2007 end?

Answer: June 2009

to take on increasingly risky bets and leverage after a key 2004 decision. The last year of Bush's second term was dominated by the Great Recession. GDP declined in the 1st, 3rd, and 4th quarters of 2008 by -2.7%, -1.9% and -8.2%, respectively. The recession officially lasted from December 2007 to June 2009, with the economy returning to consistent growth in Q3 2009, although civilian employment did not return to its December 2007 peak until September 2014. Fed chair Ben Bernanke explained in 2010 that vulnerabilities in the global financial system built up over a long period of time, and


Question: When did the financial crisis appear to have ended?

Answer: June 2009

of 2012, in the United States, a large volume of troubled mortgages remained in place. It had proved impossible for most homeowners facing foreclosure to refinance or modify their mortgages and foreclosure rates remained high. The US recession that began in December 2007 ended in June 2009, according to the US National Bureau of Economic Research (NBER) and the financial crisis appears to have ended about the same time. In April 2009 "TIME" magazine declared "More Quickly Than It Began, The Banking Crisis Is Over." The United States Financial Crisis Inquiry Commission dates the crisis to 2008. President Barack Obama


Question: What was the name of the article that appeared in TIME magazine in April 2009 declaring the crisis over?

Answer: More Quickly Than It Began, The Banking Crisis Is Over."

of 2012, in the United States, a large volume of troubled mortgages remained in place. It had proved impossible for most homeowners facing foreclosure to refinance or modify their mortgages and foreclosure rates remained high. The US recession that began in December 2007 ended in June 2009, according to the US National Bureau of Economic Research (NBER) and the financial crisis appears to have ended about the same time. In April 2009 "TIME" magazine declared "More Quickly Than It Began, The Banking Crisis Is Over." The United States Financial Crisis Inquiry Commission dates the crisis to 2008. President Barack Obama


Question: On what date did President Barack Obama declare that the markets are stabilized?

Answer: January 27, 2010

Secretary Steven Chu was chosen as the designated survivor and did not attend the speech. The 2010 State of the Union Address was given by United States President Barack Obama on January 27, 2010, to a joint session of Congress. It was aired on all the major networks starting at 9 pm ET. It was Obama's first State of the Union Address, though the president did give a non-State of the Union address to a joint session of Congress a month after taking office in 2009. The speech was delivered in the United States House of Representatives in the United


Question: Who led global economic growth after the financial crisis?

Answer: "emerging" and "developing" economies

itself some observers furthermore noted a change in social relations as some group culpability emerged. "Advanced" economies led global economic growth prior to the financial crisis with "emerging" and "developing" economies lagging behind. The crisis overturned this relationship. The International Monetary Fund found that "advanced" economies accounted for only 26.5% of global GDP while emerging and developing economies accounted for 73.5% of global GDP (PPP) from 2007 to 2017. In the table, the names of emerging and developing economies are shown in boldface type, while the names of developed economies are in Roman (regular) type. The initial articles and some


Question: What relationship between advanced and emerging/developing was completely overturned by the financial crisis of 2007?

Answer: global economic growth

itself some observers furthermore noted a change in social relations as some group culpability emerged. "Advanced" economies led global economic growth prior to the financial crisis with "emerging" and "developing" economies lagging behind. The crisis overturned this relationship. The International Monetary Fund found that "advanced" economies accounted for only 26.5% of global GDP while emerging and developing economies accounted for 73.5% of global GDP (PPP) from 2007 to 2017. In the table, the names of emerging and developing economies are shown in boldface type, while the names of developed economies are in Roman (regular) type. The initial articles and some


Question: What economies led global economic growth prior to the financial crisis?

Answer: Advanced economies

to withstand the financial crisis of 2008 and 2009 and most insurance companies restored their capital to pre-crisis levels by the end of 2010. With the continuation of the gradual recovery of the global economy, it is likely the insurance industry will continue to see growth in premium income both in industrialised countries and emerging markets in 2011. Advanced economies account for the bulk of global insurance. With premium income of $1.62 trillion, Europe was the most important region in 2010, followed by North America $1.409 trillion and Asia $1.161 trillion. Europe has however seen a decline in premium income


Question: Who believed that the growth of the commercial real estate bubble indicated that U.S. housing policy was not the cause of the crisis?

Answer: Krugman

the 1997–2007 period" but "the losses associated with mortgage delinquencies and defaults when these bubbles deflated were far lower than the losses suffered in the United States when the 1997–2007 [bubble] deflated." According to Wallison, the reason the US "residential housing" bubble (as opposed to other types of bubbles) led to financial crisis was that it was supported by a huge number of substandard loans—generally with low or no downpayments. Krugman's contention (that the growth of a commercial real estate bubble indicates that US housing policy was not the cause of the crisis) is challenged by additional analysis. After researching


Question: When did Xudong An and Anthony B. Sanders issue a report about commercial mortgage-backed securities?

Answer: December 2010

1997–2007 period" but "the losses associated with mortgage delinquencies and defaults when these bubbles deflated were far lower than the losses suffered in the United States when the 1997–2007 [bubble] deflated." Other analysis calls into question the validity of comparing the residential loan crisis to the commercial loan crisis. After researching the default of commercial loans during the financial crisis, Xudong An and Anthony B. Sanders reported (in December 2010): "We find limited evidence that substantial deterioration in CMBS [commercial mortgage-backed securities] loan underwriting occurred prior to the crisis." Other analysts support the contention that the crisis in commercial real


Question: According to business journalist Kimberly Amadeo, when did the first signs of decline in real estate occur?

Answer: 2006

mortgage-backed securities] loan underwriting occurred prior to the crisis." Other analysts support the contention that the crisis in commercial real estate and related lending took place "after" the crisis in residential real estate. Business journalist Kimberly Amadeo reports: "The first signs of decline in residential real estate occurred in 2006. Three years later, commercial real estate started feeling the effects. Denice A. Gierach, a real estate attorney and CPA, wrote:...most of the commercial real estate loans were good loans destroyed by a really bad economy. In other words, the borrowers did not cause the loans to go bad, it was


Question: What are CMBS?

Answer: commercial mortgage-backed securities

and update ratings for investors based on performance, delinquency and potential loss events affecting the loans within the trust. Commercial mortgage-backed security Commercial mortgage-backed securities (CMBS) are a type of mortgage-backed security backed by commercial mortgages rather than residential real estate. CMBS tend to be more complex and volatile than residential mortgage-backed securities due to the unique nature of the underlying property assets. CMBS issues are usually structured as multiple tranches, similar to collateralized mortgage obligations (CMO), rather than typical residential "passthroughs." The typical structure for the securitization of commercial real estate loans is a real estate mortgage investment conduit


Question: According to most analysts, what crisis took place after the crisis in residential real estate?

Answer: the crisis in commercial real estate

mortgage-backed securities] loan underwriting occurred prior to the crisis." Other analysts support the contention that the crisis in commercial real estate and related lending took place "after" the crisis in residential real estate. Business journalist Kimberly Amadeo reports: "The first signs of decline in residential real estate occurred in 2006. Three years later, commercial real estate started feeling the effects. Denice A. Gierach, a real estate attorney and CPA, wrote:...most of the commercial real estate loans were good loans destroyed by a really bad economy. In other words, the borrowers did not cause the loans to go bad, it was


Question: What is one investment assigned safe ratings by the credit rating agencies?

Answer: collateralized debt obligation

Pool of Money" (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with financial innovation such as the mortgage-backed security (MBS) and collateralized debt obligation (CDO), which were assigned safe ratings by the credit rating agencies. In effect, Wall Street connected this pool of money to the mortgage market in


Question: How much was invested worldwide in fixed income investments?

Answer: $70 trillion

Pool of Money" (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with financial innovation such as the mortgage-backed security (MBS) and collateralized debt obligation (CDO), which were assigned safe ratings by the credit rating agencies. In effect, Wall Street connected this pool of money to the mortgage market in


Question: How much did the pool of money invested worldwide in fixed income investments grow in size from 2000 to 2007?

Answer: roughly doubled in size

Pool of Money" (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with financial innovation such as the mortgage-backed security (MBS) and collateralized debt obligation (CDO), which were assigned safe ratings by the credit rating agencies. In effect, Wall Street connected this pool of money to the mortgage market in


Question: What is an example of a product Wall Street invented to answer the demand for income generating investments?

Answer: mortgage-backed security

Pool of Money" (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with financial innovation such as the mortgage-backed security (MBS) and collateralized debt obligation (CDO), which were assigned safe ratings by the credit rating agencies. In effect, Wall Street connected this pool of money to the mortgage market in


Question: In the 2000s, investors were seeking higher yields than those offered by this investment?

Answer: U.S. Treasury bonds

approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses. One narrative describing the causes of the crisis begins with the significant increase in savings available for investment during the 2000–2007 period when the global pool of fixed-income securities increased from approximately $36 trillion in 2000 to $70 trillion by 2007. This "Giant Pool of Money" increased as savings from high-growth developing nations entered global capital markets. Investors searching for higher yields than those offered by U.S. Treasury bonds sought alternatives globally. The temptation offered by such readily available savings


Question: What is the name of the securities that enabled financial institutions to obtain investor funds to finance subprime?

Answer: collateralized debt obligation

rating agencies. In effect, Wall Street connected this pool of money to the mortgage market in the US, with enormous fees accruing to those throughout the mortgage supply chain, from the mortgage broker selling the loans to small banks that funded the brokers and the large investment banks behind them. By approximately 2003, the supply of mortgages originated at traditional lending standards had been exhausted, and continued strong demand began to drive down lending standards. The collateralized debt obligation in particular enabled financial institutions to obtain investor funds to finance subprime and other lending, extending or increasing the housing bubble


Question: What type ratings did securities first in line receive from rating agencies?

Answer: investment-grade ratings

and generating large fees. This essentially places cash payments from multiple mortgages or other debt obligations into a single pool from which specific securities draw in a specific sequence of priority. Those securities first in line received investment-grade ratings from rating agencies. Securities with lower priority had lower credit ratings but theoretically a higher rate of return on the amount invested. By September 2008, average US housing prices had declined by over 20% from their mid-2006 peak. As prices declined, borrowers with adjustable-rate mortgages could not refinance to avoid the higher payments associated with rising interest rates and began to


Question: What type pool do collateralized debt obligations place their payments from mortgages into?

Answer: single pool

and generating large fees. This essentially places cash payments from multiple mortgages or other debt obligations into a single pool from which specific securities draw in a specific sequence of priority. Those securities first in line received investment-grade ratings from rating agencies. Securities with lower priority had lower credit ratings but theoretically a higher rate of return on the amount invested. By September 2008, average US housing prices had declined by over 20% from their mid-2006 peak. As prices declined, borrowers with adjustable-rate mortgages could not refinance to avoid the higher payments associated with rising interest rates and began to


Question: What securities had lower credit ratings but potentially a higher rate of return?

Answer: Securities with lower priority

and generating large fees. This essentially places cash payments from multiple mortgages or other debt obligations into a single pool from which specific securities draw in a specific sequence of priority. Those securities first in line received investment-grade ratings from rating agencies. Securities with lower priority had lower credit ratings but theoretically a higher rate of return on the amount invested. By September 2008, average US housing prices had declined by over 20% from their mid-2006 peak. As prices declined, borrowers with adjustable-rate mortgages could not refinance to avoid the higher payments associated with rising interest rates and began to


Question: How much had average U.S. housing prices declined by September 2008?

Answer: over 20%

at the heart of the crisis. By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak. This major and unexpected decline in house prices means that many borrowers have zero or negative equity in their homes, meaning their homes were worth less than their mortgages. As of March 2008, an estimated 8.8 million borrowers – 10.8% of all homeowners – had negative equity in their homes, a number that is believed to have risen to 12 million by November 2008. By September 2010, 23% of all U.S. homes were worth less than the mortgage


Question: When was the peak of U.S. housing prices?

Answer: mid-2006

S&P/Case-Shiller housing price index, by November 2007, average U.S. housing prices had fallen approximately 8% from their mid-2006 peak and by June 2008 this was approximately 20%. Sales volume (units) of new homes dropped by 26.4% in 2007 versus the prior year. By January 2008, the inventory of unsold new homes stood at 9.8 months based on December 2007 sales volume, the highest level since 1981. Housing prices are expected to continue declining until this inventory of surplus homes (excess supply) is reduced to more typical levels. As MBS and CDO valuation is related to the value of the underlying


Question: How many foreclosure proceedings were initiated by lenders in 2007?

Answer: nearly 1.3 million

default. During 2007, lenders began foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007. By August 2008, 9.2% of all US mortgages outstanding were either delinquent or in foreclosure. By September 2009, this had risen to 14.4%. Lower interest rates encouraged borrowing. From 2000 to 2003, the Federal Reserve lowered the federal funds rate target from 6.5% to 1.0%. This was done to soften the effects of the collapse of the dot-com bubble and the September 2001 terrorist attacks, as well as to combat a


Question: What was the percentage increase on foreclosure proceedings from 2007 to 2008?

Answer: 81%

default. During 2007, lenders began foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007. By August 2008, 9.2% of all US mortgages outstanding were either delinquent or in foreclosure. By September 2009, this had risen to 14.4%. Lower interest rates encouraged borrowing. From 2000 to 2003, the Federal Reserve lowered the federal funds rate target from 6.5% to 1.0%. This was done to soften the effects of the collapse of the dot-com bubble and the September 2001 terrorist attacks, as well as to combat a


Question: How many U.S. mortgages were either delinquent or in foreclosure by September 2009?

Answer: 14.4%

2008, 9.2% of all U.S. mortgages outstanding were either delinquent or in foreclosure. By September 2009, this had risen to 14.4%. Between August 2007 and October 2008, 936,439 US residences completed foreclosure. Foreclosures are concentrated in particular states both in terms of the number and rate of foreclosure filings. Ten states accounted for 74% of the foreclosure filings during 2008; the top two (California and Florida) represented 41%. Nine states were above the national foreclosure rate average of 1.84% of households. "The FBI defines mortgage fraud as 'the intentional misstatement, misrepresentation, or omission by an applicant or other interest parties,


Question: Was was the federal funds rate target lowered to by the Federal Reserve in 2003?

Answer: 1.0%

concerned that Federal Reserve actions could give rise to moral hazard. A Government Accountability Office critic said that the Federal Reserve Bank of New York's rescue of Long-Term Capital Management in 1998 would encourage large financial institutions to believe that the Federal Reserve would intervene on their behalf if risky loans went sour because they were "too big to fail." A contributing factor to the rise in house prices was the Federal Reserve's lowering of interest rates early in the decade. From 2000 to 2003, the Federal Reserve lowered the federal funds rate target from 6.5% to 1.0%. This was


Question: In the early 2000s, what type bubble did some economists believe the Fed needed to create to replace the Nasdaq bubble?

Answer: a housing bubble

perceived risk of deflation. As early as 2002 it was apparent that credit was fueling housing instead of business investment as some economists went so far as to advocate that the Fed "needs to create a housing bubble to replace the Nasdaq bubble". Moreover, empirical studies using data from advanced countries show that excessive credit growth contributed greatly to the severity of the crisis. Additional downward pressure on interest rates was created by the high and rising US current account deficit, which peaked along with the housing bubble in 2006. Federal Reserve chairman Ben Bernanke explained how trade deficits required


Question: What contributed greatly to the severity of the financial crisis of 2007?

Answer: excessive credit growth

perceived risk of deflation. As early as 2002 it was apparent that credit was fueling housing instead of business investment as some economists went so far as to advocate that the Fed "needs to create a housing bubble to replace the Nasdaq bubble". Moreover, empirical studies using data from advanced countries show that excessive credit growth contributed greatly to the severity of the crisis. Additional downward pressure on interest rates was created by the high and rising US current account deficit, which peaked along with the housing bubble in 2006. Federal Reserve chairman Ben Bernanke explained how trade deficits required


Question: What encouraged borrowing from 2000 to 2003?

Answer: Lower interest rates

default. During 2007, lenders began foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007. By August 2008, 9.2% of all US mortgages outstanding were either delinquent or in foreclosure. By September 2009, this had risen to 14.4%. Lower interest rates encouraged borrowing. From 2000 to 2003, the Federal Reserve lowered the federal funds rate target from 6.5% to 1.0%. This was done to soften the effects of the collapse of the dot-com bubble and the September 2001 terrorist attacks, as well as to combat a


Question: Per Bernanke, how much did the U.S. current account deficit increase between 1996 and 2004?

Answer: $650 billion

the US to borrow money from abroad, in the process bidding up bond prices and lowering interest rates. Bernanke explained that between 1996 and 2004, the US current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. Financing these deficits required the country to borrow large sums from abroad, much of it from countries running trade surpluses. These were mainly the emerging economies in Asia and oil-exporting nations. The balance of payments identity requires that a country (such as the US) running a current account deficit also have a capital account (investment) surplus of the same amount.


Question: What percentage of GDP was the U.S. current account deficit in 2004?

Answer: 5.8%

losses during 2007 and 2008 as a result of marking-down MBS asset prices to market value. In 2005, Ben Bernanke addressed the implications of the United States's high and rising current account deficit, resulting from U.S. investment exceeding its savings, or imports exceeding exports. Between 1996 and 2004, the U.S. current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. The U.S. attracted a great deal of foreign investment, mainly from the emerging economies in Asia and oil-exporting nations. The balance of payments identity requires that a country (such as the U.S.) running a current account deficit


Question: What emerging economies did the U.S. borrow money from between 1996 and 2004 to finance its imports?

Answer: Asia and oil-exporting nations

2004, the USA current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. Financing these deficits required the USA to borrow large sums from abroad, much of it from countries running trade surpluses, mainly the emerging economies in Asia and oil-exporting nations. The balance of payments identity requires that a country (such as the USA) running a current account deficit also have a capital account (investment) surplus of the same amount. Hence large and growing amounts of foreign funds (capital) flowed into the USA to finance its imports. This created demand for various types of financial assets,


Question: What type account is needed by the U.S. to balance an account deficit?

Answer: capital account

account is classified as "below the line" and so not reported as part of the capital account. Expressed with the broader meaning for the "capital account", the BoP identity states that any current account surplus will be balanced by a capital account deficit of equal size – or alternatively a current account deficit will be balanced by a corresponding capital account surplus: The "balancing item", which may be positive or negative, is simply an amount that accounts for any statistical errors and assures that the current and capital accounts sum to zero. By the principles of double entry accounting, an


Question: Where did the U.S. obtain capital to finance its imports?

Answer: foreign funds

2004, the USA current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. Financing these deficits required the USA to borrow large sums from abroad, much of it from countries running trade surpluses, mainly the emerging economies in Asia and oil-exporting nations. The balance of payments identity requires that a country (such as the USA) running a current account deficit also have a capital account (investment) surplus of the same amount. Hence large and growing amounts of foreign funds (capital) flowed into the USA to finance its imports. This created demand for various types of financial assets,


Question: How do asset prices generally move in relation to interest rates?

Answer: inversely

of the direct effect of the crisis. US households, on the other hand, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets. Financial institutions invested foreign funds in mortgage-backed securities. The Fed then raised the Fed funds rate significantly between July 2004 and July 2006. This contributed to an increase in 1-year and 5-year adjustable-rate mortgage (ARM) rates, making ARM interest rate resets more expensive for homeowners. This may have also contributed to the deflating of the housing bubble, as asset prices generally move inversely to interest rates, and it


Question: Beginning in July 2004, what did the Fed do to make ARM rates more expensive for homeowners?

Answer: raised the Fed funds rate

of the September 2001 terrorist attacks, and to combat the perceived risk of deflation. The Fed then raised the Fed funds rate significantly between July 2004 and July 2006. This contributed to an increase in 1-year and 5-year adjustable-rate mortgage (ARM) rates, making ARM interest rate resets more expensive for homeowners. This may have also contributed to the deflating of the housing bubble, as asset prices generally move inversely to interest rates and it became riskier to speculate in housing. Globalization and trade imbalances contributed to enormous inflows of money into the U.S. from high savings countries, fueling debt-driven consumption


Question: How did U.S. housing and financial assets react to the housing bubble burst?

Answer: dramatically declined in value

became riskier to speculate in housing. US housing and financial assets dramatically declined in value after the housing bubble burst. Subprime lending standards declined in the USA: in early 2000, a subprime borrower had a FICO score of 660 or less. By 2005, many lenders dropped the required FICO score to 620, making it much easier to qualify for prime loans and making subprime lending a riskier business. Proof of income and assets were de-emphasized. Loans moved from full documentation to low documentation to no documentation. One subprime mortgage product that gained wide acceptance was the no income, no job,


Question: Richard M. Bowen III testified to the Financial Crisis Inquiry Commission regarding his tenure at which financial institution?

Answer: Citigroup

no asset verification required (NINJA) mortgage. Informally, these loans were aptly referred to as "liar loans" because they encouraged borrowers to be less than honest in the loan application process. Testimony given to the Financial Crisis Inquiry Commission by Richard M. Bowen III on events during his tenure as the Business Chief Underwriter for Correspondent Lending in the Consumer Lending Group for Citigroup (where he was responsible for over 220 professional underwriters) suggests that by the final years of the US housing bubble (2006–2007), the collapse of mortgage underwriting standards was endemic. His testimony stated that by 2006, 60% of


Question: How many underwriters was Richard M. Bowen III responsible for at Citigroup?

Answer: 220

no asset verification required (NINJA) mortgage. Informally, these loans were aptly referred to as "liar loans" because they encouraged borrowers to be less than honest in the loan application process. Testimony given to the Financial Crisis Inquiry Commission by Richard M. Bowen III on events during his tenure as the Business Chief Underwriter for Correspondent Lending in the Consumer Lending Group for Citigroup (where he was responsible for over 220 professional underwriters) suggests that by the final years of the US housing bubble (2006–2007), the collapse of mortgage underwriting standards was endemic. His testimony stated that by 2006, 60% of


Question: In 2006, how many mortgage companies were contractually responsible to meet Citi's standards?

Answer: 1,600

mortgages purchased by Citi from some 1,600 mortgage companies were "defective" (were not underwritten to policy, or did not contain all policy-required documents)—this, despite the fact that each of these 1,600 originators was contractually responsible (certified via representations and warrantees) that its mortgage originations met Citi's standards. Moreover, during 2007, "defective mortgages (from mortgage originators contractually bound to perform underwriting to Citi's standards) increased ... to over 80% of production". In separate testimony to Financial Crisis Inquiry Commission, officers of Clayton Holdings—the largest residential loan due diligence and securitization surveillance company in the United States and Europe—testified that Clayton's review


Question: During 2007, what was the percent of defective mortgages not underwritten to Citi's standards?

Answer: over 80%

mortgages purchased by Citi from some 1,600 mortgage companies were "defective" (were not underwritten to policy, or did not contain all policy-required documents)—this, despite the fact that each of these 1,600 originators was contractually responsible (certified via representations and warrantees) that its mortgage originations met Citi's standards. Moreover, during 2007, "defective mortgages (from mortgage originators contractually bound to perform underwriting to Citi's standards) increased ... to over 80% of production". In separate testimony to Financial Crisis Inquiry Commission, officers of Clayton Holdings—the largest residential loan due diligence and securitization surveillance company in the United States and Europe—testified that Clayton's review


Question: Who was the largest residential loan due diligence and securitization surveillance company?

Answer: Clayton Holdings

mortgages purchased by Citi from some 1,600 mortgage companies were "defective" (were not underwritten to policy, or did not contain all policy-required documents)—this, despite the fact that each of these 1,600 originators was contractually responsible (certified via representations and warrantees) that its mortgage originations met Citi's standards. Moreover, during 2007, "defective mortgages (from mortgage originators contractually bound to perform underwriting to Citi's standards) increased ... to over 80% of production". In separate testimony to Financial Crisis Inquiry Commission, officers of Clayton Holdings—the largest residential loan due diligence and securitization surveillance company in the United States and Europe—testified that Clayton's review


Question: According to Clayton Holdings, how many mortgages issued from January 2006 to June 2007 met underwriting standards?

Answer: 54%

of over 900,000 mortgages issued from January 2006 to June 2007 revealed that scarcely 54% of the loans met their originators' underwriting standards. The analysis (conducted on behalf of 23 investment and commercial banks, including 7 "too big to fail" banks) additionally showed that 28% of the sampled loans did not meet the minimal standards of any issuer. Clayton's analysis further showed that 39% of these loans (i.e. those not meeting "any" issuer's minimal underwriting standards) were subsequently securitized and sold to investors. There is strong evidence that the GSEs—due to their large size and market power—were far more effective


Question: How many investment and commercial banks were included in Clayton Holdings' analysis of January 2006 to June 2007 loans?

Answer: 23

of over 900,000 mortgages issued from January 2006 to June 2007 revealed that scarcely 54% of the loans met their originators' underwriting standards. The analysis (conducted on behalf of 23 investment and commercial banks, including 7 "too big to fail" banks) additionally showed that 28% of the sampled loans did not meet the minimal standards of any issuer. Clayton's analysis further showed that 39% of these loans (i.e. those not meeting "any" issuer's minimal underwriting standards) were subsequently securitized and sold to investors. There is strong evidence that the GSEs—due to their large size and market power—were far more effective


Question: Per Clayton's analysis of loans issued from January 2006 to June 2007, what percent of loans did not meet minimal standards of any issuer?

Answer: 28%

of over 900,000 mortgages issued from January 2006 to June 2007 revealed that scarcely 54% of the loans met their originators' underwriting standards. The analysis (conducted on behalf of 23 investment and commercial banks, including 7 "too big to fail" banks) additionally showed that 28% of the sampled loans did not meet the minimal standards of any issuer. Clayton's analysis further showed that 39% of these loans (i.e. those not meeting "any" issuer's minimal underwriting standards) were subsequently securitized and sold to investors. There is strong evidence that the GSEs—due to their large size and market power—were far more effective


Question: What is the name for lending that entices borrowers to enter into unsafe secured loans?

Answer: Predatory lending

at policing underwriting by originators and forcing underwriters to repurchase defective loans. By contrast, private securitizers have been far less aggressive and less effective in recovering losses from originators on behalf of investors. Predatory lending refers to the practice of unscrupulous lenders, enticing borrowers to enter into "unsafe" or "unsound" secured loans for inappropriate purposes. A classic bait-and-switch method was used by Countrywide Financial, advertising low interest rates for home refinancing. Such loans were covered by very detailed contracts, and swapped for more expensive loan products on the day of closing. Whereas the advertisement might state that 1% or 1.5%


Question: What company used a classic bait-and-switch method by advertising low interest rates?

Answer: Countrywide Financial

at policing underwriting by originators and forcing underwriters to repurchase defective loans. By contrast, private securitizers have been far less aggressive and less effective in recovering losses from originators on behalf of investors. Predatory lending refers to the practice of unscrupulous lenders, enticing borrowers to enter into "unsafe" or "unsound" secured loans for inappropriate purposes. A classic bait-and-switch method was used by Countrywide Financial, advertising low interest rates for home refinancing. Such loans were covered by very detailed contracts, and swapped for more expensive loan products on the day of closing. Whereas the advertisement might state that 1% or 1.5%


Question: Which type loan would the consumer be put into instead of the 1% or 1.5% interest rate loan as advertised?

Answer: adjustable rate mortgage (ARM)

bait-and-switch method was used by Countrywide, advertising low interest rates for home refinancing. Such loans were written into mind-numbingly detailed contracts and then swapped for more expensive loan products on the day of closing. Whereas the advertisement might have stated that 1% or 1.5% interest would be charged, the consumer would be put into an adjustable rate mortgage (ARM) in which the interest charged would be greater than the amount of interest paid. This created negative amortization, which the credit consumer might not notice until long after the loan transaction had been consummated. Countrywide, sued by California Attorney General Jerry


Question: What was created when the interest charged was greater than the amount of interest paid?

Answer: negative amortization

bait-and-switch method was used by Countrywide, advertising low interest rates for home refinancing. Such loans were written into mind-numbingly detailed contracts and then swapped for more expensive loan products on the day of closing. Whereas the advertisement might have stated that 1% or 1.5% interest would be charged, the consumer would be put into an adjustable rate mortgage (ARM) in which the interest charged would be greater than the amount of interest paid. This created negative amortization, which the credit consumer might not notice until long after the loan transaction had been consummated. Countrywide, sued by California Attorney General Jerry


Question: What type predatory lending method did Countrywide Financial use?

Answer: classic bait-and-switch

at policing underwriting by originators and forcing underwriters to repurchase defective loans. By contrast, private securitizers have been far less aggressive and less effective in recovering losses from originators on behalf of investors. Predatory lending refers to the practice of unscrupulous lenders, enticing borrowers to enter into "unsafe" or "unsound" secured loans for inappropriate purposes. A classic bait-and-switch method was used by Countrywide Financial, advertising low interest rates for home refinancing. Such loans were covered by very detailed contracts, and swapped for more expensive loan products on the day of closing. Whereas the advertisement might state that 1% or 1.5%


Question: Who sued Countrywide for unfair business practices and false advertising?

Answer: California Attorney General Jerry Brown

interest would be charged, the consumer would be put into an adjustable rate mortgage (ARM) in which the interest charged would be greater than the mortgage payments, creating negative amortization which the credit consumer might not notice until long after the loan transaction had been consummated. Countrywide, sued by California Attorney General Jerry Brown for "unfair business practices" and "false advertising", was making high cost mortgages "to homeowners with weak credit, adjustable rate mortgages (ARMs) that allowed homeowners to make interest-only payments". When housing prices decreased, homeowners in ARMs then had little incentive to pay their monthly payments, since their


Question: What type mortgages allowed homeowners to make interest-only payments?

Answer: adjustable rate mortgages (ARMs)

interest would be charged, the consumer would be put into an adjustable rate mortgage (ARM) in which the interest charged would be greater than the mortgage payments, creating negative amortization which the credit consumer might not notice until long after the loan transaction had been consummated. Countrywide, sued by California Attorney General Jerry Brown for "unfair business practices" and "false advertising", was making high cost mortgages "to homeowners with weak credit, adjustable rate mortgages (ARMs) that allowed homeowners to make interest-only payments". When housing prices decreased, homeowners in ARMs then had little incentive to pay their monthly payments, since their


Question: What happened to home equity when housing prices decreased?

Answer: disappeared

Brown for "Unfair Business Practices" and "False Advertising" was making high cost mortgages "to homeowners with weak credit, adjustable rate mortgages (ARMs) that allowed homeowners to make interest-only payments.". When housing prices decreased, homeowners in ARMs then had little incentive to pay their monthly payments, since their home equity had disappeared. This caused Countrywide's financial condition to deteriorate, ultimately resulting in a decision by the Office of Thrift Supervision to seize the lender. Countrywide, according to Republican Lawmakers, had involved itself in making low-cost loans to politicians, for purposes of gaining political favors. Former employees from Ameriquest, which was United


Question: Who made the decision to seize Countrywide after their financial condition deteriorated?

Answer: Office of Thrift Supervision

home equity had disappeared. This caused Countrywide's financial condition to deteriorate, ultimately resulting in a decision by the Office of Thrift Supervision to seize the lender. One Countrywide employee—who would later plead guilty to two counts of wire fraud and spent 18 months in prison—stated that, "If you had a pulse, we gave you a loan." Former employees from Ameriquest, which was United States' leading wholesale lender, described a system in which they were pushed to falsify mortgage documents and then sell the mortgages to Wall Street banks eager to make fast profits. There is growing evidence that such mortgage


Question: What type credit did borrowers obtaining mortgages from Countrywide have?

Answer: weak credit

interest would be charged, the consumer would be put into an adjustable rate mortgage (ARM) in which the interest charged would be greater than the mortgage payments, creating negative amortization which the credit consumer might not notice until long after the loan transaction had been consummated. Countrywide, sued by California Attorney General Jerry Brown for "unfair business practices" and "false advertising", was making high cost mortgages "to homeowners with weak credit, adjustable rate mortgages (ARMs) that allowed homeowners to make interest-only payments". When housing prices decreased, homeowners in ARMs then had little incentive to pay their monthly payments, since their


Question: What economist believed that regulations did not keep up with financial innovation?

Answer: Paul Krugman

to self-reinforcing asset price and credit cycles." Nobel laureate economist Paul Krugman described the run on the shadow banking system as the "core of what happened" to cause the crisis. As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible – and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank


Question: Who was the U.S. Treasury Secretary dealing with the aftermath of the financial crisis of 2007?

Answer: Timothy Geithner

18, 2008, Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke met with key legislators to propose a $700 billion emergency bailout. Bernanke reportedly told them: "If we don't do this, we may not have an economy on Monday." The Emergency Economic Stabilization Act, which implemented the Troubled Asset Relief Program (TARP), was signed into law by President George W. Bush on October 3, 2008. Economist Paul Krugman and US Treasury Secretary Timothy Geithner explain the credit crisis via the implosion of the shadow banking system, which had grown to nearly equal the importance of the traditional commercial banking sector


Question: Which group's study suggested that Basel accords encourage unconventional business practices?

Answer: OECD

management and supervision including enhanced Pillar 2 guidelines, (d) enhanced Pillar 3 disclosures related to securitization, off-balance sheet exposures and trading activities which would promote transparency, and (e) cross-border supervisory cooperation. Given one of the major factors which drove the crisis was the evaporation of liquidity in the financial markets, the BCBS also published principles for better liquidity management and supervision in September 2008. A recent OECD study suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced adverse systemic shocks that materialised during the financial crisis. According to the study,


Question: It has been argued that what did not keep up with financial innovation?

Answer: regulatory framework

perform. In addition, the increased risk (in the form of financial leverage) taken by the major investment banks was not adequately factored into the compensation of senior executives. Bank CEO Jamie Dimon argued: "Rewards have to track real, sustained, risk-adjusted performance. Golden parachutes, special contracts, and unreasonable perks must disappear. There must be a relentless focus on risk management that starts at the top of the organization and permeates down to the entire firm. This should be business-as-usual, but at too many places, it wasn't." Critics have argued that the regulatory framework did not keep pace with financial innovation, such


Question: What accords possibly contributed to or reinforced the financial crisis?

Answer: Basel

frauds may be a cause of the crisis. A 2012 OECD study suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced the financial crisis. In other cases, laws were changed or enforcement weakened in parts of the financial system. Key examples include: Prior to the crisis, financial institutions became highly leveraged, increasing their appetite for risky investments and reducing their resilience in case of losses. Much of this leverage was achieved using complex financial instruments such as off-balance sheet securitization and derivatives, which made it difficult for creditors and regulators


Question: What did financial institutions do prior to the crisis?

Answer: became highly leveraged

frauds may be a cause of the crisis. A 2012 OECD study suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced the financial crisis. In other cases, laws were changed or enforcement weakened in parts of the financial system. Key examples include: Prior to the crisis, financial institutions became highly leveraged, increasing their appetite for risky investments and reducing their resilience in case of losses. Much of this leverage was achieved using complex financial instruments such as off-balance sheet securitization and derivatives, which made it difficult for creditors and regulators


Question: What type financial instruments are off-balance sheet securitization and derivatives?

Answer: complex

frauds may be a cause of the crisis. A 2012 OECD study suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced the financial crisis. In other cases, laws were changed or enforcement weakened in parts of the financial system. Key examples include: Prior to the crisis, financial institutions became highly leveraged, increasing their appetite for risky investments and reducing their resilience in case of losses. Much of this leverage was achieved using complex financial instruments such as off-balance sheet securitization and derivatives, which made it difficult for creditors and regulators


Question: Who bailed out financial institutions?

Answer: government

back investors who refuse to roll over their ABCP. Several major financial institutions collapsed in the following year because of solvency issues and have to be bailed out by government. See Financial crisis of 2007–2008 for details on the crisis and see Great Recession for the recession triggered by the financial crisis. In December 2007, ABCP outstanding dropped from $1.3 trillion to $833 billion. By the end of 2008, there is no SIV left. As of March 2013, the outstanding of ABCP is about $300 billion. An ABCP conduit is set up by a sponsoring financial institution (henceforth, sponsor). The


Question: Which option was nearly impossible for financial institutions to reorganize under?

Answer: bankruptcy

to monitor and try to reduce financial institution risk levels. These instruments also made it virtually impossible to reorganize financial institutions in bankruptcy, and contributed to the need for government bailouts. US households and financial institutions became increasingly indebted or overleveraged during the years preceding the crisis. This increased their vulnerability to the collapse of the housing bubble and worsened the ensuing economic downturn. Key statistics include: Free cash used by consumers from home equity extraction doubled from $627 billion in 2001 to $1,428 billion in 2005 as the housing bubble built, a total of nearly $5 trillion over the


Question: What are the type financial instruments that were difficult for creditors and regulators to monitor?

Answer: complex financial instruments

frauds may be a cause of the crisis. A 2012 OECD study suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced the financial crisis. In other cases, laws were changed or enforcement weakened in parts of the financial system. Key examples include: Prior to the crisis, financial institutions became highly leveraged, increasing their appetite for risky investments and reducing their resilience in case of losses. Much of this leverage was achieved using complex financial instruments such as off-balance sheet securitization and derivatives, which made it difficult for creditors and regulators


Question: How many U.S. investment banks significantly increased their financial leverage from 2004 to 2007?

Answer: five

K. Black — lamenting as “terrible” that the “FBI got virtually no assistance from the regulators, the banking regulators and the thrift regulators.” During the investment banking crisis in 2008, some analysts blamed the Securities and Exchange Commission (SEC) for its 2004 decision that, they claimed, allowed greater leverage. This leverage enabled investment banks to substantially increase the level of debt they were taking on, fueling the growth in mortgage-backed securities supporting subprime mortgages. Subsequent analysis brings these claims into question. The critics note that the top five US investment banks each significantly increased their financial leverage during the 2004–2007


Question: U.S. investment banks Increased their financial leverage and also increased their vulnerability to what?

Answer: financial shock

period, contributing to economic growth worldwide. US home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 trillion. US household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990. In 1981, US private debt was 123% of GDP; by the third quarter of 2008, it was 290%. From 2004 to 2007, the top five US investment banks each significantly increased their financial leverage (see diagram), which increased their vulnerability to a financial shock. Changes in capital requirements, intended


Question: Changes in what intended to keep U.S. banks competitive with their European counterparts?

Answer: capital requirements

Council (WPC) have argued that European powers such as France and Germany pushed dogmatically and naively for the adoption of the "Basel II recommendations", adopted in 2005, transposed in European Union law through the Capital Requirements Directive (CRD). In essence, they forced European banks, and, more importantly, the European Central Bank itself, to rely more than ever on the standardized assessments of "credit risk" marketed aggressively by two US credit rating agencies – Moody's and S&P, thus using public policy and ultimately taxpayers' money to strengthen anti-competitive duopolistic practices akin to exclusive dealing. Ironically, European governments have abdicated most of


Question: How much debt did the top five U.S. investment banks report in fiscal year 2007?

Answer: over $4.1 trillion

Commission (SEC) decision related to the net capital rule allowed US investment banks to issue substantially more debt, which was then used to purchase MBS. Over 2004–07, the top five US investment banks each significantly increased their financial leverage (see diagram), which increased their vulnerability to the declining value of MBSs. These five institutions reported over $4.1 trillion in debt for fiscal year 2007, about 30% of US nominal GDP for 2007. Further, the percentage of subprime mortgages originated to total originations increased from below 10% in 2001–03 to between 18–20% from 2004 to 2006, due in-part to financing from


Question: What financial institution went bankrupt and was liquidated in 2007?

Answer: Lehman Brothers

to keep US banks competitive with their European counterparts, allowed lower "risk weightings" for AAA securities. The shift from first-loss tranches to AAA tranches was seen by regulators as a risk reduction that compensated the higher leverage. These five institutions reported over $4.1 trillion in debt for fiscal year 2007, about 30% of US nominal GDP for 2007. Lehman Brothers went bankrupt and was liquidated, Bear Stearns and Merrill Lynch were sold at fire-sale prices, and Goldman Sachs and Morgan Stanley became commercial banks, subjecting themselves to more stringent regulation. With the exception of Lehman, these companies required or received


Question: What is an example of something that can be detrimental if too many individuals pursue the same behavior?

Answer: saving more during adverse economic conditions

mercantilist policies to stimulate exports and reduce imports are other techniques to stimulate demand. He estimated in March 2010 that developed countries representing 70% of the world's GDP were caught in a liquidity trap. Behavior that may be optimal for an individual (e.g., saving more during adverse economic conditions) can be detrimental if too many individuals pursue the same behavior, as ultimately one person's consumption is another person's income. Too many consumers attempting to save (or pay down debt) simultaneously is called the paradox of thrift and can cause or deepen a recession. Economist Hyman Minsky also described a "paradox


Question: What is it called when too many consumers attempt to save or pay down debt at the same time?

Answer: paradox of thrift

for an individual (e.g., saving more during adverse economic conditions) can be detrimental if too many individuals pursue the same behavior, as ultimately one person's consumption is another person's income. Too many consumers attempting to save (or pay down debt) simultaneously is called the paradox of thrift and can cause or deepen a recession. Economist Hyman Minsky also described a "paradox of deleveraging" as financial institutions that have too much leverage (debt relative to equity) cannot all de-leverage simultaneously without significant declines in the value of their assets. In April 2009, US Federal Reserve vice-chair Janet Yellen discussed these paradoxes:


Question: What will happen if too many consumers save or pay down debt simultaneously?

Answer: can cause or deepen a recession

for an individual (e.g., saving more during adverse economic conditions) can be detrimental if too many individuals pursue the same behavior, as ultimately one person's consumption is another person's income. Too many consumers attempting to save (or pay down debt) simultaneously is called the paradox of thrift and can cause or deepen a recession. Economist Hyman Minsky also described a "paradox of deleveraging" as financial institutions that have too much leverage (debt relative to equity) cannot all de-leverage simultaneously without significant declines in the value of their assets. In April 2009, US Federal Reserve vice-chair Janet Yellen discussed these paradoxes:


Question: Who is the economist who described a "paradox of deleveraging"?

Answer: Hyman Minsky

As well, a paradox of toil and a paradox of flexibility have been proposed: A willingness to work more in a liquidity trap and wage flexibility after a debt deflation shock may lead not only to lower wages, but lower employment. During April 2009, U.S. Federal Reserve Vice Chair Janet Yellen discussed the "Paradox of deleveraging" described by economist Hyman Minsky: "Once this massive credit crunch hit, it didn’t take long before we were in a recession. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have


Question: Financial institutions cannot all de-leverage simultaneously without a decline in the value of this?

Answer: their assets

of deleveraging" as financial institutions that have too much leverage (debt relative to equity) cannot all de-leverage simultaneously without significant declines in the value of their assets. During April 2009, U.S. Federal Reserve Vice Chair Janet Yellen discussed these paradoxes: "Once this massive credit crunch hit, it didn’t take long before we were in a recession. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year. A process of balance sheet deleveraging


Question: Who was the U.S. Federal Reserve vice-chair in April 2009?

Answer: Janet Yellen

stated he brought "decades of leadership and expertise from various roles, including serving at the International Monetary Fund and the Bank of Israel". On May 21, 2014, the Senate confirmed Fischer's appointment to the Federal Reserve Board of Governors. In a separate vote on June 12, he was confirmed as the vice chair. Fischer succeeded Janet Yellen as vice chair; Yellen became chair of the Federal Reserve earlier in 2014. Fischer resigned for personal reasons in mid-October, 2017, 8 months before the June, 2018, expiry of his term as vice chair. Fischer received an honorary doctorate from Hebrew University in


Question: What happened soon after the massive credit crunch hit?

Answer: we were in a recession

As well, a paradox of toil and a paradox of flexibility have been proposed: A willingness to work more in a liquidity trap and wage flexibility after a debt deflation shock may lead not only to lower wages, but lower employment. During April 2009, U.S. Federal Reserve Vice Chair Janet Yellen discussed the "Paradox of deleveraging" described by economist Hyman Minsky: "Once this massive credit crunch hit, it didn’t take long before we were in a recession. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have


Question: What deepened the credit crunch when demand and employment fell?

Answer: recession

As well, a paradox of toil and a paradox of flexibility have been proposed: A willingness to work more in a liquidity trap and wage flexibility after a debt deflation shock may lead not only to lower wages, but lower employment. During April 2009, U.S. Federal Reserve Vice Chair Janet Yellen discussed the "Paradox of deleveraging" described by economist Hyman Minsky: "Once this massive credit crunch hit, it didn’t take long before we were in a recession. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have


Question: What was one of the actions businesses took to preserve cash?

Answer: cancelling planned investments

has spread to nearly every corner of the economy. Consumers are pulling back on purchases, especially on durable goods, to build their savings. Businesses are cancelling planned investments and laying off workers to preserve cash. And, financial institutions are shrinking assets to bolster capital and improve their chances of weathering the current storm. Once again, Minsky understood this dynamic. He spoke of the paradox of deleveraging, in which precautions that may be smart for individuals and firms—and indeed essential to return the economy to a normal state—nevertheless magnify the distress of the economy as a whole." There are no known


Question: What occurred in nearly every corner of the economy after the financial crisis of 2007?

Answer: balance sheet deleveraging

Once this massive credit crunch hit, it didn't take long before we were in a recession. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year. A process of balance sheet deleveraging has spread to nearly every corner of the economy. Consumers are pulling back on purchases, especially on durable goods, to build their savings. Businesses are cancelling planned investments and laying off workers to preserve cash. And, financial institutions are shrinking


Question: What term refers to the ongoing development of financial products?

Answer: financial innovation

for trying too hard to inform her managers of systematic fraud in their home loans unit. Richard Bowen, chief underwriter of Citigroup's consumer division, was demoted with 218 of his 220 employees reassigned allegedly for attempting to inform several senior executives that over 80 percent of their mortgages violated Citigroup's own standards. In its "Declaration of the Summit on Financial Markets and the World Economy," dated 15 November 2008, leaders of the Group of 20 cited the following causes related to features of the modern financial markets: The term financial innovation refers to the ongoing development of financial products designed


Question: What is an example of financial innovation pertinent to the financial crisis?

Answer: adjustable-rate mortgage

to achieve particular client objectives, such as offsetting a particular risk exposure (such as the default of a borrower) or to assist with obtaining financing. Examples pertinent to this crisis included: the adjustable-rate mortgage; the bundling of subprime mortgages into mortgage-backed securities (MBS) or collateralized debt obligations (CDO) for sale to investors, a type of securitization; and a form of credit insurance called credit default swaps(CDS). The usage of these products expanded dramatically in the years leading up to the crisis. These products vary in complexity and the ease with which they can be valued on the books of financial


Question: What is the abbreviation for a form of credit insurance called credit default swaps?

Answer: CDS

Commission noted that while the credit default swaps used in synthetics were often compared to insurance, unlike insurance policies in the US they were not regulated. That meant that a party with no "insurable interest" could buy a credit default swap as a pure bet (known as “naked credit default swaps”) -- forbidden with insurance. This allowed inflation of potential losses or gains on the default of a loan or institution. Insurance regulators also required that insurers put aside reserves in case of a loss. In the housing boom, CDS were sold by firms that failed to put up any


Question: What is the financial innovation that bundles subprime mortgages?

Answer: mortgage-backed securities (MBS)

became less willing to invest in mortgage-backed securities (MBS). The crisis began to affect the financial sector in February 2007, when HSBC, one of the world's largest banks, wrote down its holdings of subprime-related mortgage securities by $10.5 billion, the first major subprime related loss to be reported. By April 2007, over 50 mortgage companies had declared bankruptcy, many of which had specialized in subprime mortgages, the largest of which was New Century Financial. At least 100 mortgage companies either shut down, suspended operations or were sold during 2007. These mortgage companies made money on the origination and sale of


Question: What happened to the usage of financial innovation products in the years leading up the financial crisis?

Answer: expanded dramatically

the adjustable-rate mortgage; the bundling of subprime mortgages into mortgage-backed securities (MBS) or collateralized debt obligations (CDO) for sale to investors, a type of securitization; and a form of credit insurance called credit default swaps (CDS). The usage of these products expanded dramatically in the years leading up to the crisis. These products vary in complexity and the ease with which they can be valued on the books of financial institutions. CDO issuance grew from an estimated $20 billion in Q1 2004 to its peak of over $180 billion by Q1 2007, then declined back under $20 billion by Q1