Question 2.4 Explain the root causes and subsequent effects of the 2008 financial crisis and

2.4 Explain the root causes and subsequent effects of the 2008 financial crisis and recession.

1) Securitization is the process of pooling mortgages or other types of loans and selling the claims or securities against that pool in the secondary market.

2) Securitization made it harder for banks to lend money because they could not pass the risk on to other investors.

3) Mortgage-backed securities are securities that represent claims on the cash flows generated by a pool of mortgages.

4) Prior to the 2008 financial crisis, most investors viewed mortgage-backed securities as relatively safe investments.

5) Subprime mortgages are mortgage loans made to borrowers with high incomes and better than average credit histories.

6) Recessions associated with a banking crisis tend to be more severe than other recessions because many businesses rely on credit to operate.

7) The process of pooling mortgages or other types of loans and selling the claims or securities against that pool in the secondary market is called ________.

A) valuation

B) securitization

C) private placement

D) capital restructuring

8) The primary risk of mortgage-backed securities is ________.

A) that the prices of have high volatality

B) that the prices of housing will increase

C) that the government will not be able to meet the guarantees on the cash flows

D) that homeowners may not be able to, or choose not to, repay their loans

9) Which of the following is true of mortgage-backed securities?

A) Mortgage-backed securities assure a flat 15% return.

B) Mortgage-backed securities are guaranteed by the U.S. government.

C) Mortgage-backed securities can only be purchased by investment banks.

D) Mortgage-backed securities represent claims on the cash flows generated by a pool of homeloans.

10) When home prices are falling, we would expect a(n) ________.

A) high mortgage default rates

B) low mortgage default rates

C) unchanged mortgage default rates

D) higher percentage of owner home equity

11) A crisis in the financial sector often spills over into other industries because when financial institutions ________ borrowing, activity in most other industries ________.

A) increase; slows down

B) contract; slows down

C) increase; increases

D) contract; increases

2.5 Understand the major regulations and regulatory bodies that affect financial institutions and markets.

1) The Glass-Steagall Act ________.

A) was intended to regulate the activities in the secondary market

B) created the Securities Exchange Commission

C) separated the activities of commercial and investment banks

D) was intended to regulate the activities in the primary market

2) The Securities Act of 1933 focuses on regulating the sale of securities in the primary market, whereas the 1934 Act deals with the regulations governing the transactions in the secondary market.

3) The Federal Deposit Insurance Corporation (FDIC) ________.

A) is an agency, created by the Glass-Steagall Act ,that monitors banks on a regular basis to ensure that they were safe and sound

B) is an agency that monitors business combinations between commercial banks, investment banks, and

insurance companies

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