role of investment banks during the 2008 financial crisis
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Write around 300 words about the role of investment banks during the 2008 financial crisis
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- The _____ rate is the lending rate at which the largest and most creditworthy corporations borrow money from banks. annualunsecured securedprimeAssume the Bank of Smallville opens its doors to depositors and receives $100,000 in cash deposits. a) Prepare a balance sheet for Bank of Smallville based on the above information. b) Assume furthermore that the bank has to abide by a 20% reserve ratio. How much in excess reserves does the bank hold? Could this bank make a loan in the amount of $90,000? Briefly explain. c) Based on the amount of excess reserves, if the bank makes the loans, show the immediate impact on the Bank of Smallville's balance sheet. d) Calculate value of the money multiplier? e) How much money would be created in the banking system if other banks also lend as much as possible? Part B a) What is meant by the term "excess supply of money?" How does the money market resolve this disequilibrium? b) Explain with diagrams, what happens to the money supply, interest rates, investment spending and GDP when the central bank makes open market purchases.During the class lecture we learned that the U.S. commercial paper market collapsed during the 2008 Financial Crisis. --- Commercial paper are simply unsecured notes that large corporations sell to investors. This is a common method that large firms use to raise quick cash without having to make a formal bank loan application. During 2008-2009, the Federal Reserve Bank was forced to enter into this marketplace to buy commercial paper in order to prevent the crisis from getting worse. (Free Gift: Mark True - This Is True - Gee Thanks Mr. Torres !) True or False True False
- Discuss how the subprime mortgage crisis of 2007 was based upon the flawed financial model that house prices only increase.In 2008, the United States began to witness one of the worst recessions since the 1930s. The collapse of the housing bubble in 2006 led to a massive decline in real estate prices, affecting consumers and institutions, especially banking and financial entities. Severe liquidity shortfalls in the United States as well as other global markets led to a serious credit crisis. During the credit crisis of 2008-2009, several banks and other businesses went through a reorganization process or were forced to liquidate. Consider the following example: In January 2009, American electronics retailer Circuit City Inc. closed all of its stores and sold all of its merchandise. Source: "Circuit City to Shut Down." CNN Money. Cable News Network, n.d. Web. August 31, 2010. http://money.cnn.com/2009/01/16/news/companies/circuit_city This is an example of: O Reorganization O LiquidationWhat are bank assets used for? Bank liabilities are the sources of bank ________? Bank capital is the contribution of the bank's owners; it acts as a cushion against what? Banks make a profit for their owners. Measures of a bank's profitability include what four things? Banks' off-balance-sheet activities have become increasingly important in recent years. What are these two things? Banks face several types of risk in day-to-day business. List them:
- 1. Define what are mortgage bonds, and how are they involved in the lead-up to the financial crisis of 2007-2008? 2. Define what Ponzi Scheme is and explain why the subprime lending industry, depicted in the movie, is like Ponzi Scheme? 3. Give at least three (3) main reasons why the Global Financial Crisis of 2007-2008 happened? Provide a thorough explanation for each reason. 4. The Global Financial Crisis started in the US in 2007-2008, however, discuss why do you think companies outside the US (international companies) were still heavily devastated by this crisis .A bank has the following balance sheet. It expects a net deposit drain of $500,000. Assets Liabilities and Equity Cash $300,000 Deposits $3,115,000 Loans 2,000,000 Equity 385,000 Securities 1,200,000 Total Asset $3,500,000 Total Liabilities and Equity $3,500,000 What is a net deposit drain and why is it of concern for the bank? Show the bank’s balance sheet if it uses stored liquidity to offset the expected drain.Our textbook claims that one of the key services banks provide is maturity intermediation: what exactly does this mean? (Choose an answer from the list below; only one is correct.) Reference: Chapter 11 and/or Chapter 1 Banks borrow money from their younger customers and lend it to their older customers. Banks gather small deposits and use them to make large investments, allowing small investors to collectively buy large assets. Banks are funded with deposits that they promise to return on demand but use them to make long-term loans, which creates a mismatch in the maturities of their assets & liabilities.
- QUESTION #1 Populate the following “T-accounts” with the following data, please make sure where double entry is required $100 million in mortgage-backed securities (MBS) $200 million demand deposits $20 million in reserves held by banks $100 million in Treasury securities held by banks $50 million in Treasury securities held by the Fed $5 million in overnight borrowing by banks from the Fed Households Banks Federal Reserve Treasury ___A_______L___ ___A_______L___ ___A_____L___ ___A_____L___What is a financial market? What is the role of a financial market? 3-2 What would happen to the standard of living in the United States if people lost faith in our financial markets? Why? 3-3 How does a cost-efficient capital market help to reduce the prices of goods and services? 3-4 The SEC attempts to protect investors who are purchasing newly issued securities by requiring issuers to provide relevant financial information to prospective investors. The SEC does not provide an opinion about the real value of the securities. Hence, an unwise investor might pay too much for some stocks and consequently lose heavily. Do you think the SEC should, as a part of every new stock or bond offering, render an opinion to investors on the proper value of the securities being offered? Explain.How did a decline in housing prices help trigger the subprime financial crisis that began in 2007? Explain.