Chapters 17-23 and conclusion

Directions: Answer all the below questions using the Cassidy book (Chapters 17-23 and conclusion)

  1. Using the prisoner’s dilemma show why a conservative bank would have to take great risks in the banking industry by offering liar loans, subprime loans, Adjustable ARM loans, etc.
  2. Show how a leveraged bank can make higher profits during a boom than an unleveraged firm. Then, show how a leveraged bank can lose much more of its capital during a recession than an unleveraged bank.
  3. Explain how Greenspan was guilty of the law of small numbers.
  4. Explain how the subprime loan market is a market for lemons.
  5. What is the problem with VAR (value at risk) models?
  6. Why did so many investment banks have to start buying CDO’s and other mortgaged backed securities themselves (rather than selling them to other investors). Why did they buy these assets?
  7. Why is the London Bridge a good analogy for what can happen in financial markets?
  8. How does the mark to market accounting system lead to more bubbles and crashes?
  9. What was the Fed’s initial response the crisis (before Bear Stearns)?
  10. Why did the government bailout Bear Stearns, Fannie Mae, Freddie Mac and AIG but not Lehman?


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