FIN 437 International Financial Markets and Banking

Impact of the Credit Crisis on Financial Market Liquidity

Explain the link between the credit crisis and the lack of liquidity in the debt markets.  Offer some insight as to why the debt markets became inactive.  How were interest rates affected?  What happened to initial public offering (IPO) activity during the credit crisis?  Why?

Mortgage-Backed Securities and Risk Taking by Financial Institutions

Do you think that the institutional investors that purchased mortgage-backed securities containing subprime mortgages were following reasonable investment guidelines?  Address this issue for various types of financial institutions such as pension funds, commercial banks, insurance companies and mutual funds (your answer might differ with the type of institutional investor).  If financial institutions are taking on too much risk, how should regulations be changed to limit such excessive risk taking?

Pension Fund Investments in Lehman Brothers’ Debt

At the time that Lehman Brothers filed for bankruptcy, financial institutions serving municipalities in California were holding more than $300 billion in debt issued by Lehman.  Do you think that municipal pension funds that purchased commercial paper and other debt securities issued by Lehman Brothers were following reasonable investment guidelines?  If a pension fund is taking on too much risk, how should regulations be changed to limit such excessive risk taking?

Future Valuation of Mortgage-Backed Securities

Commercial banks must periodically “mark to market” their assets in order to determine the capital they need.  Identify some advantages and disadvantages of this method, and propose a solution that would be fair to both commercial banks and regulators.

Future Structure of Rating Agencies

Rating agencies rated the so-called tranches of mortgage-backed securities that were sold to institutional investors.  Explain why the performance of these agencies was criticized, and then defend against this criticism on behalf of the agencies.  Was the criticism of the agencies justified?  How could rating agencies be structured or regulated in a different manner in order to prevent the problems that occurred during the credit crisis?

Sale of Bear Stearns

Review the arguments that have been made for the government-orchestrated sale of Bear Stearns.  If Bear Stearns had been allowed to fail, what types of financial institutions would have been adversely affected?  In other words, who benefitted from the government’s action to prevent the failure of Bear Stearns?  Do you think Bear Stearns should have been allowed to fail?  Explain your answer.

Bailout of AIG

Review the arguments that have been made for the bailout of American International Group (AIG).  If AIG had been allowed to fail, what types of financial institutions would have been adversely affected?  That is, who benefitted from the bailout of AIG? Do you think AIG should have been allowed to fail?  Explain your answer.

Executive Compensation at Financial Institutions

Discuss the compensation received by executives at some financial institutions that experienced financial problems (e.g., AIG, Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual).  Should these executives have been allowed to retain the bonuses they received in the 2007-2008 period?  Should executive compensation at financial institutions be capped?  (Don’t forget to consider the marketability of talent in the industry when forming your response. The solution is not as simple as many think.)

Role of the Treasury and the Fed in the Credit Crisis

Summarize the various ways in which the US Treasury and the Federal Reserve intervened to resolve the credit crisis.  Discuss the pros and cons of their interventions.  Offer your own opinion regarding whether they should have intervened.

Impact of credit crisis over the financial market liquidity:

According to the movie, it has been analyzed that the any kind of credit crisis makes an impact over the financial market liquidity very badly. In this movie, the debt market of the country has been affected at a large and thus the financial institute stopped to give the debt and loan to the comapny. Due to the financial crisis faced by the comapny, the IPO of the company has been affected and the required investment has not been get by the company. The interest rate of the debt has also been enhanced by the financial institutes to reduce the debt demand in the market.  

Mortgage backed securities $ risk taking financial institutions:

In this movie, the comapny has mortgaged some securities in the banks and the other financial institutions such as mutual funds, mortgages etc. to raise the funds through loan. In the case of the financial crisis, the bank has the mortgage assets and thus the risk of the bank get reduced regarding the debt which has been given by the banks and other financial institutes to the comapny. Through this it has been analyzed that the mortgage backed assets make it easy for the comapny to manage the risk.

Pension fund investment in Lehman Brothers’ Debt:

Lehman brother’s debt has faced the financial crisis at a huge level. The comapny has made some investment into the pension fund for its employees and the corporation to reduce the level of risk and manage the fund at urgency time. Through the movie, i have analyzed that the investment guidelines have not been followed properly. The regulations are required to set a particular limit to make a proper decision (Moohr, 2013).

Future valuation of mortgage backed securities:

In this movie, when the Lehman brothers put their assets as a mortgage asset into the financial institute to raise the funds than the banks and other financial institute has measured the future valuation of the asset and according to that value the mortgage amount has been given to the comapny. In the movie, banks have considered the time value of money to measure the future value of the assets. It is required for the financial institutions to manage and analyze the future value so that the risk occurrence chances get reduce. This film depict that the financial institute must assure about the real worth of the assets after a particular period of time.

Future structure of rating agencies:

Rating agencies are those which give the rating to a comapny n the basis of their performance and the debt payment structure. According to the given rating, it becomes easy for the loan provider companies and the financial institute to identify the level of the comapny and ensure that the comapny would repay the amount into the given period. According to the movie, the future structure of the rating agencies must be in such a manner that the entire related factors of financial system of a comapny is recognized and a better decision making is done by the financial institutions accordingly. In the movies, it become bit difficult for the banks to analyze that whether the firm would be able to repay the debt amount in the given time or whether the financial performance of the comapny would be stable (HBO, 2017).

Sale of bear Stearns:

According to the movie, on 14^th march 2008, New York’s Federal Reserve Bank agreed to offer a loan worth of $ 25 billion to Bear Stearns by clear and free assets from the Bear Stearns to offer the liquidity position of the comapny in next 28 days which has been rejected and refused by the market and financial analyst in the market. Further, few changes have been made by the New York’s Federal Reserve Bank into the deal and they have proposed the bear Stearns that it won’t be possible for them to offer a 28 days loan to the comapny. And lastly, the comapny has been sold in $ 30 billion.

Bailout of AIG:

After the selling of assets of Bear Stearns, it made a new contract with the JP Morgan Chase of merging the companies by swapping the stock in the market worth $ 2 per stock or less than the market value of bear sterns by 7% before 2 days of the deal. According to this deal, both the companies were trying to manipulate the investors and shareholders about the performance of the comapny and this became the big reason behind the financial crisis. After merging both the companies, the total loan was $ 30 billion out of which $ 1 billion was mortgage loan which could not be getting back by the comapny through selling the assets of the comapny (Centre, 2013). And the mortgage asset of the comapny is of less worth than the loan.

Executive compensation at financial institutions:

In the movie, it has been found that the financial institutions always got extra compensation to manage the level of the funds and reduce the level of the risk in the financial market of the country. According to the movie, the federal bank has offered extra compensation to the financial institution to manage the level of the risk and reduce the loss which has been faced by the financial institutions due to the financial crisis. The executive compensation which has been offered to the executives of the financial institutions was way better even in the financial crisis in the market.

Role of treasury and the fed in credit crisis:

According to the movie, the treasure managed by the comapny, Lehman brothers helped the comapny a lot in managing and fighting back with the financial crisis situation in the market, the short term demand has been met by the comapny through the treasury maintained by the comapny and the fed bailout has also been seen and found that due to these factors, the level of the financial crisis managed by the economy and the country.

Thus this movie has explained the various levels and learning about the financial market and the various other related factors which could affect the financial market of a country.

References:

Center, B. P. (2013). Too Big to Fail: The Path to a Solution. Economic Policy Program, Financial Regulatory Reform Initiative.

Moohr, G. S. (2013). White Collar Crime Goes to the Movies. Ohio St. J. Crim. L., 11, 785.

HBO. (2017). Too big to fail, retrieved from http://www.hbo.com/#/movies/too-big-to-fail available on 17th Oct 2017.