Professional Documents
Culture Documents
Lecture 11
Learning Objectives
• By the conclusion of the lecture:
– Students should understand the structure of sub prime crisis:
> Sub prime housing loans;
> Mortgage & bond insurers ( Monoline);
> Collaterised debt obligations;
> Credit Default swaps;
> Structured Investment Vehicles.
• Have defined some of the causes of the crisis.
• Have noted the attitude of financial institutions & regulators.
• “GREED IS GOOD”
• (SOURCE:Gordon Geko- “Wall Street” and
“Wall Street : Money Never Sleeps”.)
• The original Act was passed by the 95th United States Congress and signed into law
by President Jimmy Carter in 1977 (Pub.L. 95-128, 12 U.S.C. ch.30).[38] Several
legislative and regulatory revisions have since been enacted.
• is a United States federal law designed to encourage commercial banks and
savings associations to meet the needs of borrowers in all segments of their
communities, including low- and moderate-income neighborhoods.[1][2][3] Congress
passed the Act in 1977 to reduce discriminatory credit practices against low-income
neighborhoods, a practice known as redlining.[4][5] The Act requires the appropriate
federal financial supervisory agencies to encourage regulated financial institutions to
meet the credit needs of the local communities in which they are chartered, consistent
with safe and sound operation. (See full text of Act and current regulations.[1
• ] The same Federal banking agencies that are responsible for supervising depository
institutions are also the agencies that conduct examinations for CRA compliance.[10]
These agencies are the Federal Reserve System (FRB), the
Federal Deposit Insurance Corporation (FDIC), the
Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision
(OTS).
• Problem one:
– Selling a CDO (Timber Wolf) which their
own managers said (as recorded on tape)
was a “sh---ty” investment.
• Problem 2:
– Alleged involvement in fraud with a hedge
fund over CDO’s sold to clients- Abacus
CDO.
Department of Accounting and Finance Slide 44
Timberwolf
• http://www.youtube.com/watch?
v=5bS6UsWKMuk
• http://www.youtube.com/watch?
v=n9uipRLT0e4
• In terms of volume:
– Nominal value of CDS contract
outstanding is US$42.6 trillion
• By comparison:
– US household wealth is $18.5 trillion;
– Capitalisation of US stock market is
$18.5 trillion
– US treasuries market is $4.5 trillion.
Department of Accounting and Finance Slide 55
(3)
• The combination of a bond from a lesser rated company, with a
CDS from a bank or insurance company can raise the rating of
the bond.
• Hence if we wish to invest in an A rated bond, we have two
choices:
– Invest in an A rated company, or
– Invest in a lower rated company which has a supporting
CDS from at least an A rated organisation.
• This latter investment combination is termed a synthetic bond.
Copyright © (2008). NOT FOR RESALE. All materials produced for this course of
study are reproduced under Part VB of the Copyright Act 1968, or with
permission of the copyright owner or under terms of database agreements.
These materials are protected by copyright. Monash students are permitted to
use these materials for personal study and research only. Use of these
materials for any other purposes, including copying or resale, without express
permission of the copyright owner, may infringe copyright. The copyright
owner may take action against you for infringement