45 terms

2008 Financial Crisis

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Derivatives
privately held negotiable contract between two parties, a security, its value is reliant upon different assets such as stocks, bonds, commodities, interest rates, etc
Credit Default Swap
a type of derivative/insurance involving a third party, i.e. if a bank loans a person money, a third person may insure the bank while betting on whether or not the person will pay back the loan
Risk
the degree of uncertainty associated with the return on an asset or the value of an asset
Bond
a loan to a government or corporation in return for a promised repayment at a specified interest rate
Hedge-fund
an investment fund normally with a limited number of investors focusing on a specific type of investment strategy, tend to be subject to less regulation and fewer restrictions than many other investments such as mutual funds
Collateralized Debt Obligation
financial tool/type of derivative that bundles individual loans into a product that can be sold on the secondary market, a way for companies to increase their liquidity
Subprime Mortgages
mortgages made to individuals with low income, few assets, and weak credit history, the risk of default is much greater than regular mortgages
Interest Rates
the rate at which interest is paid by borrowers for the use of money that they borrow from a lender
Leverage
Borrowing by an individual or institution to expand the size of an investment. In doing so, the potential return from the investment may increase as well as the risk of the investment
Foreclosure
The legal process used to force the payment of debt secured by collateral (such as a house) whereby the property is sold to satisfy the debt. Usually this means a family needs to leave their house because they cannot pay their mortgage
Mutual Fund
a group of financial investments often of a specific category, managed by professionals with many individual or institutional investors
Stress Test
a form of deliberately intense or thorough testing used to determine the stability of an economy or entity
Real Estate Bubble
A run-up in housing prices fueled by demand, speculation and the belief that recent history is an infallible forecast of the future - when demand decreases while supply increases so the price drops
Liquidity
the degree of difficulty in converting an asset into money
Debt
Money owed also known as liability
Equity
ownership interest in an asset after liabilities are deducted. i.e. the value of your house after deducting the total amount of your mortgage
Moral Hazard
when a party takes on more risk because the costs of that risk will not be felt by the party taking the risk
Monetary Policy
a central bank (the fed in the US) that controls the amount of money in circulation, the volume of credit, and the rate of interest. Influences employment, output, and the general level of prices
Fiscal Policy
The use of government spending and taxation to influence the economy
Too big to fail
theory that if a financial institution is giant and is woven into various facets of the economy, its failure will lead to an economic collapse or meltdown
Henry "Hank" Paulson
Secretary of Treasury under GW Bush, involved in several different multi-billion bailout packages, worked for Goldman Sachs, has been criticized for being slow to respond to the crisis, and introducing greater uncertainty into the financial markets by letting Lehman Brothers fail.
Bear Stearns
Global investment bank, securities trading, and brokerage firm. During the 2008 Financial Crisis, first large financial institution to collapse, ,JP Morgan acquired
AIG
a multinational insurance corporation, major player involved in CDS, US government offered bailout
Goldman Sachs
America's multinational investment banking firm, one of the world's premier banks, having controversy about its having the most profitable year, involved in bailout of AIG
Tim Geithner
Secretary of Treasury under Obama, NY Fed Chair, arranged rescue and sale of Bear Stearns, supported AIG from bankruptcy, repeatedly raised concerns about the failure of banks to understand their risks, including those taken through derivatives, he and the Federal Reserve system did not act with enough force to blunt the troubles that ensued. That was largely because he and other regulators relied too much on assurances from senior banking executives that their firms were safe and sound.
Larry Summers
Secretary of the Treasury under Clinton, chosen by Obama to be the director of White house National Economic Council, who supported regulations and government's involvement, testified before the Senate that derivatives shouldn't be regulated.
Alan Greenspan
Federal Reserve Chairman ('87-'06), brought super low interest rates - part of causes
Fannie Mae
Federal National Mortgage Association; also a government -sponsored enterprise. Its purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities, allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing reliance on thrifts,
Freddie Mac
An acronym of the Federal Home Loan Mortgage Corporation, a public government -sponsored enterprise. Created in 1970 to expand the secondary market for mortgages in the US
Paul Volker
President of Obama's Economic Recovery Advisory Board, Chairman of the Fed from '79 to '87, raised the Fed funds to 20% and kept it high until he saw that inflation was in check Thanks to _______economists and central bankers now know that managing inflation expectations is critical to ending inflation itself --Volcker Rule: rule prohibits large banks from taking the kinds of risks that could result in their failure, prompting a bail-out,
Securities and Exchange Commission
protects investors, maintains fair, orderly, and efficient markets, and facilitates capital formation,
Brooksley Born
Appointed to CFTC 96-99. The first to realize the deadliness of CDSs and advocated for regulation. The likes of Alan Greenspan and Arthur Levitt disagreed with Born despite she would be proven to be correct.
JPMorgan
leader in corporate finance, bought Washington Mutual in 2008, made CDO deals with Magnetar, took over Bear Stearns
Glass Steagall Act
prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities, protected bank depositors from the additional risks associated with security transactions, repealed in 1999
Dodd Frank Bill
increased government oversight of trading in complex financial instruments such as derivatives, restricts the types of proprietary trading activities that financial institutions will be allowed to practice, passed with the intent of preventing the collapse of major financial institutions such as Lehman Brothers from happening again.
Ben Bernanke
Chairman of the Federal Reserve '06-, chairman of the U.S. President's Council of Economic Advisors prior to being nominated as Greenspan's successor in late 2005,
Control externalities, protect property rights, lower cost of doing business, provide public goods, redistribute wealth
Government Roles
Rule of Law
Authority and influence of law in society especially as a constraint upon behavior
buying and selling bonds, discount rate, federal fund rate
Interest Rates Determined by ...
increase money supply
to decrease unemployment...
decrease money supply
to increase unemployment...
increase interest rates, invest, increase demands for exports
to appreciate currency
Asset
backed security whose value and income payments are derived from underlying assets
Bank run
a series of unexpected cash withdrawals made by fearful people who think the bank will fail, thus maybe forcing the bank out of business as they deplete the cash available
Capital
the wealth, cash or other financial assets, used to establish or maintain a business