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Mgmt Strategy Exam 2

Terms in this set (51)

1) FDR- New Deal
>Works Progress Administration (WPA)
>CCC- gave the people something to work for so they would have something to lose & reason not to overthrow govt
>Federal Housing Admin (FHA)- redlining was drawing lines on a map to decide which minority areas wouldnt get a loan
>Fannie Mae/Freddie Mac- banker sells loan, gets reward, sells loan to govt at no risk

2) Glass Steagal 1932
>law that separated people's life savings from investment banks
>ended up w JP Morgan Chase & Morgan Stanley

3) Mortage Bonds- Salomon Brothers (Public)
>"AAA" rating scale was a way of organizing mortages into these bonds
-these stabilized income stream & discouraged ppl from paying off early

4) Financial Services Modernization Act 1999
>this ended Glass Stegal & allowed commercial investment banks to merge

5) Derivatives
>Enron was 1st to come up w weather derivatives
>snowmobile company needed protection if its warm outside for too long so investors hedged this risk by betting on a longer winter in florida
>Derivatives are ways of hedging against unforeseen events like an insurance policy except there were no collateral requirements.
>They are also used for speculation. Speculation are legal bets
>guy from The Big Short started looking at these bonds that banks would sell mortgages & they would be packed into bonds. These mortgages were rated AAA but were bound to default. So he bet against the market. He had bet 1 billion against them, & in order to do this he had to pay premiums (SIVs-Structured Investment Vehicles) to the banks

6) Exotic Loans- not FHA
>FHA verifies you have capital, savings, income, FICO score to make sure you will pay back what you borrowed
>"interest only" loans where you only pay the interest on a house & when it increases in value the next year, you sell it & pocket the profit. but housing prices going up is a huge assumption

7) NINJA- No Income No Job Approved loan
>scene from Big Short where stripper owns 5 houses
>banks sold these loans & then sold them off so they were risk free. Countrywide did this

8) Rating Agencies (S&P, Moody's, Fitch)
>they look at these bonds & then rate them, but they only looked at the top "AAA"
>so why are agencies rating them? bc Solomon Brothers became public & shareholders wanted growth

9) Adjustable Rate Mortgages (ARM)
>start at an interest rate & can either go up or down but they always go up
>"Teaser rates" will go up & people w these expensive homes can no longer pay the rates so they default on their loans

-The bubble burst when the value of homes went down & people started walking away from their homes
-companies began to 'restate' their balance sheets, went from black to in the red
-banks didnt completely collapse bc they'd fake the loans & bet against their products- SWAPS
-AIG was the biggest sucker in all of this