You and a friend are discussing the savings and loan crisis. She states that "the whole mess started in the early 1980s. When short-term rates skyrocketed, S&Ls got killed- their spread income went from positive to negative. They were borrowing short and lending long." a. What does she mean by "borrowing short and lending long"? b. Are higher or lower interest borrows short and lends long?

You and a friend are discussing the savings and loan crisis. She states that "the whole mess started in the early 1980s. When short-term rates skyrocketed, S&Ls got killed- their spread income went from positive to negative. They were borrowing short and lending long." a. What does she mean by "borrowing short and lending long"? b. Are higher or lower interest borrows short and lends long?

Business/Professional Ethics Directors/Executives/Acct

8th Edition

ISBN:9781337485913

Author:BROOKS

Publisher:BROOKS

Chapter8: Subprime Lending Fiasco-ethics Issues

Section: Chapter Questions

Problem 6.1EC

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You and a friend are discussing the savings and loan crisis. She states that '' the whole mess started in the early 1980s. When short-term rates skyrocketed, S&Ls got killed their spread income went from positive to negative. They were borrowing short and lending long'' a. What does she mean by '' borrowing short and lending long''? b. Are higher or lower interest rates beneficial to an institution that borrows short and lends long?
Which of the following was NOT a direct and major consequence of the 2007-2009 U.S. Subprime Financial Crisis? Group of answer choices a. Small consumer and household savers lost all their money they had in savings accounts due to the failure of many smaller FDIC member banks b. Many people lost their homes when they could no longer make their payments after their subprime mortgage rates reset to a much higher rate after two years c. Lehman suffered a major financial collapse and ultimately was dissolved after many of its remaining parts were purchased by Barclays and Nomura, among others d. The U.S. stock markets dropped dramatically as the credit fueled economy of the mid-2000s started to suffer after the credit bubble began to burst.
Which of the following did NOT help trigger the subprime crisis in 2007? Housing prices stopped climbing and actually started falling around 2006 Borrowers were offered teaser loans like 2/28 to get them into loans they could not otherwise qualify for Mortgage brokers were required by Sarbanes Oxley to personally pledge that all the loan information provided on loan applications was correct and they could be held personally responsible for any losses due to fraud Banks made loans to borrowers with very questionable income by using “liar loans”
Which of the following was NOT a direct and major consequence of the 2007-2009 U.S. Subprime Financial Crisis? a. Small consumer and household savers lost all their money they had in savings accounts due to the failure of many smaller FDIC member banks b. Many people lost their homes when they could no longer make their payments after their subprime mortgage rates reset to a much higher rate after two years c. Lehman suffered a major financial collapse and ultimately was dissolved after many of its remaining parts were purchased by Barclays and Nomura, among others d. The U.S. stock markets dropped dramatically as the credit fueled economy of the mid-2000s started to suffer after the credit bubble began to burst.
Let's say you showed your friend Cardi all these calculations, and she went, "Man, this is screwed up! Credit cards are a racket!" (Yes, Cardi, they are - if you don't pay your balance in full every month, that is.) But it's not all bad news, you tell Cardi. There is something she can do in order to reduce both her cost of borrowing and the length of time she'll be in debt. What can she do? (check all answers that apply) a. Ask her credit card company to shorten the duration of the loan. b. Make her payments earlier in the month rather than later. c. Transfer the balance to a lower interest card with another bank. d. Complain to the Consumer Financial Protection Bureau. e. Pay more than $400 every month. f. Ask her credit card company to lower the 29% interest rate. g. Occasionally make additional payments to the account.
Discuss how the subprime mortgage crisis of 2007 was based upon the flawed financial model that house prices only increase.
Imagine that you are in the position of buying loans in the secondary market (that is, buying the right to collect the payments on loans ) for a bank or othe r financia l services company.Explain why you would be willing to pay more or less for a given loan if: a. The borrower has been late on a number of loan payments b. Interest rates in the economy as a whole have risen since the bank made the loan c. The borrower is a firm that has just declared a high level of profits d. Interest rates in the economy as a whole have fallen since the bank made the loan
In periods when home prices declined substantially, some homeowners blamed the Central bank. In other periods when home prices increased, homeowners gave credit to the Central bank. How can the Central bank have such a large impact on home prices? How could news of a substantial increase in the general inflation level affect the Central bank’s monetary policy and thereby affect home prices?
Imagine that Commodore has taken out a multimilliondollar loan that must be repaid next year. How might the lender react if it learned that Commodore was using the book-and-hold method to make revenues look higher than they really are?
The economy is said to be entering a recession but your company needs to borrow money for an immediate need. Should you borrow on a long-term or short-term basis? Why?
One example of an annuity is your mortgage; you make a regular payment for a fixed number of years at a fixed rate. When it comes to mortgages, one of the reasons why so many people got in financial trouble when the housing market collapsed was because they had over-levered themselves. There were several reasons for that and rolling credit card and car debt into their mortgages was one of the most common missteps. For example, most people mistakenly think that if they owe $10,000 on a credit card at 20% and roll that into a new 30 year mortgage at 4.5%, they are saving money because they are saving over 15% a year in interest. That is only true if it takes 29 ½ years to pay off that credit card. Let’s say they pay the credit card over a period of 5 years at 20%, they will end up paying 158% of the original total ($15,896); however, if they add the balance to their mortgage at 4.5%, they will end up paying 182% of the original amount ($18,241). Explore one of the many common…
Consider two local banks. Bank A has 95 loans outstanding, each for $1.0 million, that it expects will be repaid today. Each loan has a 4% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $95 million outstanding, which it also expects will be repaid today. It also has a 4% probability of not being repaid. Which bank faces less risk? Why? A. The expected payoff is higher for Bank A, but is riskier. I prefer Bank B. B. The expected payoffs are the same, but Bank A is less risky. I prefer Bank A. C. In both cases, the expected loan payoff is the same: $95 million×0.96=$91.2 million. Consequently, I don't care which bank I own. D. The expected payoffs are the same, but Bank A is riskier. I prefer Bank B.