QUESTION 1The following quote from the 10-K filed by Bear Stearns and Company for the fiscal year ending November 30 2007 indicates that the financial services industry values people with the following characteristics: competent well trained motivated and disciplined. “There is intense competition in the financial services industry for qualified employees. In addition we face increasing competition with businesses outside the financial services industry such as hedge funds private equity funds and venture capital funds for the most highly skilled individuals. Our business could be adversely affected if we are unable to attract new employees and retain and motivate our existing employees.”TrueFalseQUESTION 2A financial institution is permitted to use leverage up to a maximum debt to equity ratio of 20. Currently the bank finances its $ 100 of assets with $10 of equity.The current debt to equity ratio is 11.TrueFalseQUESTION 3The Federal Reserve designed the Term Securities Lending Facility (TSLF) in March of 2008 so that banks could exchange asset-backed securities for U.S. Treasury bonds. This gave banks more liquid and more certain collateral that they could use in REPO transactions.TrueFalseQUESTION 4In the 10-K filed by Bear Stearns and Company for the fiscal year ending November 30 2007 management indicates that the company’s cost of capital is lined to the long and short term credit ratings of the company.TrueFalseQUESTION 5According to the FCIC report New Century Financial used the Federal Reserve discount window to raise the capital it needed to finance the origination of mortgages.TrueFalseQUESTION 6A financial institution is permitted to use leverage up to a maximum debt to equity ratio of 20. Currently the bank finances its $ 100 of assets with $10 of equity.Managers can issue $5 of additional debt and use the proceeds to buy back $5 of equity without violating the debt/equity constraint of 20.TrueFalseQUESTION 7The following statement published in the FCIC by Ralph Cioffi implies that he had more confidence the rating agencies than the overall market.“The thesis behind the fund was that the structured credit markets offered yield over and above what their ratings suggested they should offer.”TrueFalseQUESTION 8We learn from Gary Gorton’s book that asset-backed securities created by means of the securitization process were used as collateral for short term borrowing.TrueFalseQUESTION 9In the 10-K filed by Bear Stearns and Company for the fiscal year ending November 30 2007 management fails to mention the civil suits filed against BSAM stemming from the failure of the High Grade and the Enhanced Leverage hedge funds.TrueFalseQUESTION 10According to Gorton the crisis of 2007-2009 was unique in the history f the United States since it was the first financial crisis lied to the collapse of real estate values.TrueFalseQUESTION 11New Century Financial relied heavily on the REPO market for funds used to originate mortgages.TrueFalseQUESTION 12We learn from Gorton’s book that banks in August 2007 went right to the Federal Reserve discount window to replace other sources of liquidity that were becoming scarcer. In addition managers of the bank made public announcements that they were using the discount window.TrueFalseQUESTION 13The risk of depending on short term capital from repurchase agreements is that this financing must be rolled over frequently. If the financing can’t be rolled and there is no source of new equity financing the borrower will likely default.TrueFalseQUESTION 14The brand of Bear Stearns was not damaged by the actions of Ralph Cioffi and Matthew Tanin because bankers were not convicted of criminal charges.TrueFalseQUESTION 15A financial institution is permitted to use leverage up to a maximum debt to equity ratio of 20. Currently the bank finances its $ 100 of assets with $10 of equity.Managers will likely receive a margin call if asset value falls to 95.TrueFalseQUESTION 16In the 10-K filed by Bear Stearns and Company for the fiscal year ending November 30 2007 management indicates that the firm’s reputation is important to its value.TrueFalseQUESTION 17The brand of Bear Stearns was damaged by Ralph Cioffi and Matthew Tanin because their management decisions led to the collapse of two BSAM hedge funds and a civil case against them by the SEC.TrueFalseQUESTION 18A financial institution is permitted to use leverage up to a maximum debt to equity ratio of 20. Currently the bank finances its $ 100 of assets with $10 of equity.Managers will likely receive a margin call if asset value falls to 96.TrueFalseQUESTION 19In the 10-K filed by Bear Stearns and Company for the fiscal year ending November 30 2007 management indicates that credit ratings are a function of many factors including the amount of leverage the firm uses.TrueFalseQUESTION 20Gorton implies in the last paragraph of chapter 4 that the asset-backed securities backing short term debt were much less liquid than lenders had believed prior to the collapse of the subprime marketTrueFalse
