Question 1

Investors relied on the judgment of credit rating agencies because

Accepted Answer

A)   credit rating agencies are supposed to be the experts in evaluating credit risk.
B)   information directly available to investors on mortgage pools was insufficient.
C)   credit rating agencies are supposed to perform a thorough due diligence before rating a given security.
D)   credit rating agencies are supposed to be the experts in evaluating credit risk, and they are supposed to perform a thorough due diligence before rating a given security.
E)   All of these are correct.F) C) and E)
G) C) and D) E

Question 2

The 1933 Glass-Steagall Act precluded banks from

Accepted Answer

A)   subprime lending.
B)   selling insurance.
C)   underwriting insurance generating more than 10% of total banking income.
D)   underwriting securities generating more than 10% of total banking income.
E)   underwriting any securities.F) A) and B)
G) A) and C)

Question 3

Late in 2008, the International Accounting Standards Board allowed firms to

Accepted Answer

A)   reclassify devaluated financial assets delaying recognition of losses.
B)   estimate the value of the portfolio if there is no ready market for a derivative portfolio.
C)   reduce their capital requirements.
D)   accelerate the recognition of losses through mark-to-market accounting
E)   None of these are correct.F) C) and D)
G) A) and B)

Question 4

Rating agencies were exposed to a conflict of interest because

Accepted Answer

A)   credit rating agencies were rating securities and investing in those securities.
B)   credit rating agencies used ratings to sell securities.
C)   clients of the credit rating agencies used ratings to sell securities.
D)   investors do not want rating downgrades.
E)   credit rating agencies were paid by the firms who created the securities being rated.F) A) and C)
G) A) and D)

Question 5

Mark-to-market accounting is usually related to all of the following items, EXCEPT

Accepted Answer

A)   derivatives and financial instruments.
B)   firm's long term cash flows.
C)   firm's short term taxes payable.
D)   firm's short term cash flows.
E)   immediate recognition of unrealized gains and losses.F) D) and E)
G) All of the above

Question 6

An issue with mark-to-market accounting when there is a highly depressed market is that

Accepted Answer

A)   depressed values could be only temporary, portfolios are likely to re-gain value, and thus current unrealized losses are overstated.
B)   depressed values could be not only temporary, portfolios are likely to re-gain value, and thus current losses are overstated.
C)   depressed values could be only temporary, portfolios are not likely to re-gain value, and thus current losses are understated.
D)   depressed values could be only temporary, portfolios are not likely to re-gain value, and thus current non-realized gains are overstated.
E)   depressed values could be only temporary, portfolios are likely to re-gain value, and thus current non-realized losses are understated.F) A) and B)
G) A) and E)

Question 7

Which of the following is NOT an example of aggressive lending practices contributing to the subprime crisis?

Accepted Answer

A)   Mortgagors were not required to make any down payment at the inception of the loan.
B)   Loans were given to people with poor credit histories.
C)   Loans were given to people with no income.
D)   A borrower could get a second mortgage and use it as down-payment.
E)   None of these are correct.F) B) and D)
G) C) and D) A

Question 8

A fundamental problem with Goldman Sachs' GSAMP Trust was that

Accepted Answer

A)   loans were given to people with poor credit histories.
B)   homeowners' equity in the securitized mortgages was less than 1 percent on average.
C)   loans were given to people with no income.
D)   a sizeable portion of the securitized loans had little or no documentation.
E)   All of these are correct.F) A) and E)
G) C) and E)

Question 9

In simple terms, the securitization process is

Accepted Answer

A)   a way to sell structured investment vehicles (SIVs) .
B)   a way to sell accounts receivable by mortgage lenders to public investors.
C)   a way to create high-yield investments with little risk.
D)   a way to sell structured investment vehicles (SIVs) , and a way to create high-yield investments with little risk.
E)   All of these are correct.F) A) and B)
G) None of the above

Question 10

Mortgage-backed securities lost their value when

Accepted Answer

A)   the underlying assets lost their value.
B)   borrowers (the mortgagees)  walked away without real obligation to repay.
C)   mortgage originators went bankrupt.
D)   the underlying assets lost their value, and borrowers (the mortgagees)  walked away without real obligation to repay.
E)   mortgage originators went bankrupt, and borrowers (the mortgagees)  walked away without real obligation to repay.F) C) and D)
G) None of the above

Question 11

Which entities worked as second party consolidators, purchasing loans and reselling them to investors?

Accepted Answer

A)   Federal National Mortgage Association (Fannie Mae)  and Federal Home Loan Mortgage Corporation (Freddie Mac) 
B)   structured investment vehicles (SIVs) 
C)   credit rating agencies
D)   investment banks
E)   All of these are correct.F) B) and E)
G) A) and D)

Question 12

The 1999 Gramm-Leach-Bliley Act allowed banks to

Accepted Answer

A)   engage in subprime lending.
B)   sell insurance.
C)   become more involved in investment bank activities.
D)   underwrite government bonds.
E)   choose between commercial and investment bank activities.F) A) and B)
G) A) and C)

Question 13

In simple terms, a mortgage-backed security is

Accepted Answer

A)   a portfolio of mortgages sold to investors through publicly issued bonds.
B)   a contract that transfers ownership of a lender's mortgages receivable.
C)   a contract that transfers the risk of non-collection from mortgage originators to other investors.
D)   a portfolio of mortgages sold to investors through publicly issued bonds, and a contract that transfers the risk of non-collection from mortgage originators to other investors.
E)   All of these are correct.F) C) and D)
G) None of the above

Question 14

Mark-to-market accounting is incorrectly characterized as

Accepted Answer

A)   relevant for management compensation purposes.
B)   relevant for valuation purposes.
C)   relevant to investors.
D)   sometimes misleading.
E)   responsible for the subprime lending fiasco.F) B) and C)
G) All of the above

Question 15

According to former Federal Reserve Chairman Alan Greenspan, the Fed became concerned about subprime lending in 2000; however,

Accepted Answer

A)   the global demand for mortgage-backed security ended in 2005.
B)   the quality of mortgage products began to deteriorate in 2005.
C)   the global demand for mortgage-backed security started in 2003.
D)   the quality of mortgage products began to deteriorate in 2003.
E)   the global demand for mortgage-backed security ended in 2008.F) A) and E)
G) B) and E) B

Question 16

The movie The Big Short is the story of a few clever investors who realized that security markets were about to crash, and they

Accepted Answer

A)   invested in CDOs.
B)   invested in CDSs.
C)   invested in NCDSs.
D)   sold stocks short.
E)   bought gold.F) All of the above
G) A) and C)

Question 17

Goldman Sachs' GSAMP Trust was able to create AAA rated securities by

Accepted Answer

A)   separating the mortgage portfolio into tranches and assigning the tranches to share risks of default equally.
B)   not disclosing the risks clearly.
C)   guaranteeing or protecting some tranches.
D)   separating the mortgage portfolio into tranches and designating the A-1, A-2, and A-3 tranches last in order, after the M-1 to M-7 and B-1 to B-3 tranches, to suffer losses if a default occurred.
E)   All of these are correct.F) None of the above
G) A) and E)

Question 18

Which of these regulators were aware of the problem and tried to blow the whistle in 2003?

Accepted Answer

A)   Security and Exchange Commission and Federal Reserve Board
B)   Iowa and North Carolina State Attorneys
C)   Office of the Comptroller of the Currency and Office of Thrift Supervision
D)   federal banking regulators
E)   None of these are correct.F) B) and D)
G) None of the above

Question 19

Some observers claim that the U.S. Federal Reserve Board encouraged the housing and credit bubbles by

Accepted Answer

A)   not regulating subprime mortgages.
B)   cutting interest rates.
C)   enforcing mark to market accounting.
D)   not regulating subprime mortgages and cutting interest rates.
E)   not regulating subprime mortgages and enforcing mark to market accounting.F) A) and E)
G) None of the above

Question 20

Early in 2008, mark-to-market accounting provisions caused the banks to

Accepted Answer

A)   revalue their portfolio downwards.
B)   be in jeopardy of falling below the regulatory capital requirements.
C)   restrict new loans.
D)   revalue their portfolio downwards, and restrict new loans.
E)   All of these are correct.F) C) and D)
G) A) and D)

Exam 8: Subprime Lending Fiasco Ethics Issues.

Investors relied on the judgment of credit rating agencies because

Correct AnswerverifiedE

The 1933 Glass-Steagall Act precluded banks from

Correct AnswerverifiedShow Answer

Late in 2008, the International Accounting Standards Board allowed firms to

Correct AnswerverifiedShow Answer

Rating agencies were exposed to a conflict of interest because

Correct AnswerverifiedShow Answer

Mark-to-market accounting is usually related to all of the following items, EXCEPT

Correct AnswerverifiedShow Answer

An issue with mark-to-market accounting when there is a highly depressed market is that

Correct AnswerverifiedShow Answer

Which of the following is NOT an example of aggressive lending practices contributing to the subprime crisis?

Correct AnswerverifiedA

A fundamental problem with Goldman Sachs' GSAMP Trust was that

Correct AnswerverifiedShow Answer

In simple terms, the securitization process is

Correct AnswerverifiedShow Answer

Mortgage-backed securities lost their value when

Correct AnswerverifiedShow Answer

Which entities worked as second party consolidators, purchasing loans and reselling them to investors?

Correct AnswerverifiedShow Answer

The 1999 Gramm-Leach-Bliley Act allowed banks to

Correct AnswerverifiedShow Answer

In simple terms, a mortgage-backed security is

Correct AnswerverifiedShow Answer

Mark-to-market accounting is incorrectly characterized as

Correct AnswerverifiedShow Answer

According to former Federal Reserve Chairman Alan Greenspan, the Fed became concerned about subprime lending in 2000; however,

Correct AnswerverifiedB

The movie The Big Short is the story of a few clever investors who realized that security markets were about to crash, and they

Correct AnswerverifiedShow Answer

Goldman Sachs' GSAMP Trust was able to create AAA rated securities by

Correct AnswerverifiedShow Answer

Which of these regulators were aware of the problem and tried to blow the whistle in 2003?

Correct AnswerverifiedShow Answer

Some observers claim that the U.S. Federal Reserve Board encouraged the housing and credit bubbles by

Correct AnswerverifiedShow Answer

Early in 2008, mark-to-market accounting provisions caused the banks to

Correct AnswerverifiedShow Answer

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B

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