Terms

Question 1

The New Deal: Government involvement in housing

Answer 1

Facilitated homebuyer demand by:
1. Extending the mortgage contract to 30 years
2. Lowering down payment
3. Eliminating the balloon payment at maturity

Question 2

Why was Fannie Mae Created?

Answer 2

Created to augment the mortgage market and accelerate mortgage origination by purchasing mortgage loans.

Question 3

Fannie Mae Pass Through Security

Answer 3

Allowed investors to receive a share of the cash flow from mortgages based on their percent of ownership of the mortgage loan

Question 4

Freddie v. Fannie

Answer 4

They have identical business models: buying mortgages from banks using private capital that has implicit guarantee (GSE)

Freddie = purchased retail and loan (small banks/regional banks/local banks)

Fannie = purchased from commercial banks (bigger)

Question 5

Government Sponsored Enterprises (GSE)

Answer 5

1. Charter authorized by congress
2. Special lending and guarantee business
3. Can raise capital at a much lower rate
4. No regulatory risk limit

Question 6

Implicit guarantee for GSE

Answer 6

Gives GSE high credit ratings despite massive leverage (high risk in volatile markets)

Question 7

Who regulates Fannie and Freddie?

Answer 7

The Federal Housing Financing Agency (FHFA)

Question 8

Statutory Capital Requirements of Fannie and Freddie

Answer 8

1. 40x leverage for mortgages
2. 222x leverage for credit guarantee
3. Only congress can increase regulations (moral hazard)

Question 9

What did the FDIC do during the financial crisis?

Answer 9

1. Increased the line of credit with the Treasury to address solvency issues
2. Unlimited tie FDIC insurance to non-interest bearing deposits
3. Imposed premiums on banks to refund the depleted DIF
4. Temporarily liquidity guarantee program

Question 10

What is the Systemic Risk Exception?

Answer 10

Gives the FDIC the ability to do whatever is necessary to stabilize the banking system [AIG bailout]

Question 11

What does full faith and credit actually mean?

Answer 11

Symbol of confidence: The FDIC + DIF funds do not cover all of the deposits in the U.S.

Question 12

Main bank regulators

Answer 12

1. FDIC
2. Federal Reserve
3. OCC
4. SEC

Question 13

Who does the FDIC Regulate

Answer 13

1. Non-member state charter banks
2. Non-member state charter thrifts

Question 14

Who does the Federal Reserve Regulate

Answer 14

1. State charter banks
2. Bank Holding Companies
3. Foreign banks
4. Foreign ops
5. SIFI’s

Question 15

Proprietary Trading

Answer 15

Financial institutions buy and sell securities using their own capital for the profit of their own account rather that their clients

Question 16

The Volcker Rule

Answer 16

1. Restricted commercial banks investments in hedge funds and private equity.
2. Restricted proprietary trading of securities
3. Increased transparency

Question 17

The Federal Open Market Commission

Answer 17

Responsible for setting monetary policy like the target Fed Funds rate

Question 18

How to Fed aligns Effective and Target Fed Funds Rate

Answer 18

EF > T = FOMC will inject liquidity into the market by buying treasuries

EF < T = FOMC will withdraw liquidity from the market by selling treasuries

Question 19

The Federal Dual Mandate

Answer 19

1. Maximum Employment
2. Price Stability (moderate long-term interest rate)

Question 20

What constitutes a member bank with the Fed?

Answer 20

Have to purchase preferred stock in the fed regional bank + be subject to fed regulations

Question 21

Federal Reserve Act Section 13 Article 3

Answer 21

1. Allowed for emergency uncapped loan making under unusual and exigency circumstances
2. Can give credit to individuals, partnerships, or corporations
3. Restricted by Dodd-Frank

Question 22

Term Action Facility (TAF)

Answer 22

1. Cash to banks
2. Designed to inject liquidity into banks without the stigma of using the discount window by auctioning off loans

Question 23

Term Securities Lending Facility (TSLF)

Answer 23

Fed lent treasuries against risky assets to provide funding at low cost for risk

Question 24

Term Asset-Backed Securities Loan Facility (TALF)

Answer 24

Non-recourse funding for AAA backed securities

Question 25

Department of Treasury actions during the financial crisis

Answer 25

1. TARP
2. Conservatorship of Fannie and Freddie
3. Private-public investment program for legacy assets
4. Temporary guarantee for MMMF

Question 26

OIS [Overnight Indexed Swap]

Answer 26

Transactions in an interest rate swap where one received compounded floating rate and the other received fixed rate

Question 27

LIBOR-OIS spread

Answer 27

Compare LIBOR rate to the fixed rate of the OIS to measure credit risk and liquidity

Wider spread = greater fear and less confidence = greater risk

Question 28

Maiden Lane 1 [BS - JPM Merger]

Answer 28

1. $30B assets that JPM did not want [NY Fed created a LLC to purchase]
2. LLC lent $28.81B for up to 10 years at a discount rate and JPM lent $1.15B
3. Any losses by the LLC were borne by the Treasury

Question 29

Maiden Lane 2 [AIG Rescue]

Answer 29

1. FED gave $85B loan to AIG to avoid bankruptcy
2. FED bought $20.8B of RMBC securities + NY Fed provided $19.8B in 6 year loan