Things I must commit to memory for tomorrow’s exam:
JPM (Be able to briefly discuss the JPM’s organization into lines of business, its size, name its chairman, and relate one recent news item about it that may or may not have been discussed in class.)
The economist’s definition of recession. In your opinion (there is no correct answer), will the U. S. experience a “ double dip” recession? Provide a reasoned rationale for your opinion. Your rationale, regardless of your opinion, will be the basis for grading your answer.
D & O insurance.
The homework items provided to you and discussed in class. This is located in the Announcement section of MyGateway for this course., define and comment on these 13 items/institutions.
Who is Ally Bank, really?
Define inflation. What is the primary institution in the U. S. (some would argue the only institution) that has a direct and significant impact on the rate of inflation? What is the only way in which inflation can be controlled or reduced? On an exam, this question could appear in the context of deflation, in which all answers are reversed.
The Dodd-Frank Act, recently passed by Congress supposedly to prevent the excesses that led to the 2008 financial crisis and ensuing recession, created a new federal agency. What is this agency’s name, what is its purpose, and to what other federal agency does it report?
Generally speaking, the size of financial institutions of all types is measured by total assets.
In the wake of the financial crisis (and due to other longstanding economic factors) U. S. consumers and businesses are deleveraging (either voluntarily or under pressure from their creditors) while the U. S. government increases its borrowing (leverages). The behavior of consumers and businesses seems logical, but the behavior of the U. S. government appears counterintuitive. But the government’s borrowing more in the midst of recession is typical historically since it is the “borrower of last resort” and by borrowing is attempting via fiscal policy to prevent further loss of GDP and jobs. This indirect creation of jobs by the U. S. government is inefficient (relative to the creation of jobs by business) and controversial. In this course we won’t resolve whether the U. S. government is correct in continuing to leverage (choose for yourself and history will ultimately judge), but you should understand the motivation.
In your opinion, and there is no correct answer, were the bailouts of U. S. companies by the U. S. government “good” or “bad”? Explain the rationale for your opinion (for which you will be graded). Somewhere in your answer, provide the roles that Keynes and Friedman are playing in this issue as it is debated in Washington, D. C. and Wall Street.
What competitive advantage do U. S. credit unions have over U. S. commercial banks and thrifts (Savings and Loans) in consumer and business lending?
Who or what is/are PIIGS? If one or more of these countries default on their national debt, what is the worst case scenario of ensuing events?
We discussed in class how the U. S. consumer drove the economy of the U. S. for many years. Relative to the consumption rate in the U. S. over the past thirty years, briefly discuss the U. S. savings rate, per capita consumer debt, and the sustainability and risk of this relationship. And compare the savings rate of the U. S. to the savings rates in most developed countries.
List and comment on the six economic causes of the 2006 financial crisis.
The large size and complexity of the largest U. S. financial institutions can be traced, at least in part, to the climate of deregulation over the past thirty to forty years. Of the many examples of deregulation (or lax regulation) during that period, know that a key piece of deregulation was the repeal of Glass-Steagall by the passage in Congress of Gramm-Leach-Bliley in the late Nineties. Some commentators say that the recent reregulation (Dodd-Frank) doesn’t address the problem of “too big to fail”.
We discussed a long-term cause and effect cycle: High regulation of financial institutions and markets, gradual deregulation, increased competition among financial institutions, greater innovation as a means of competing, greater risk as a means of competing, financial crisis, reregulation. This “daisy chain” is overly simplistic and imperfect. But it is perhaps a reasonable way to begin thinking of the history of financial institutions and financial crises as well as the future. For this exam, don’t worry about the timeline we discussed in class.
The two reasons why you (or anyone) should study financial markets and financial institutions).
The four reasons given by the textbook (first paragraph on page 2) as to why financial markets are important.
The difference between long-term and short-term securities.
4. Why do financial professionals use the term basis point rather than percentage?
5. Other than the primary reason of maximization of shareholder wealth, why is it important for public companies to have a high price on their common stock?
6. FX market is:
· Highly regulated or not?
· Large or small in terms of dollar value?
· Volatile or not?
· Important to the American economy or not?
7. If the value of the U. S. Dollar falls relative to other major currencies, U. S. exporters will be happy or sad?
8. The four components of the financial system (financial markets, financial institutions, laws/regulations, techniques).
9. In the financial system three general events occur (securities are traded; interest rates are established; and financial services are produced, delivered and consumed).
10. Name and be able to briefly discuss two functions of the Fed other than monetary policy.
11. Name the source of the Fed’s authority.
12. Read numbers 1., 2., 3., and 4. in the Summary section of chapter one (page 14)
1. Be able to list Borrowers and Lenders on Figure 2-1 and identify the most important of each and why.
2. Name the difference between Direct and Indirect Finance and identify which is more important based on dollars of transfer.
3. In what business is AER? Based on the four defining characteristics of a financial intermediary, does AER fit that definition or not?
4. Using the four defining characteristics of a financial intermediary, explain how a mutual fund fits that definition.
5. All things being equal, is a bond or stock more risky to investors if the issuing company is in danger of bankruptcy and why?
6. Of debt and equity issued and outstanding in the United States markets, which is greater in terms of dollar amount?
7. Be able to categorize a security based on the structure of financial markets:
· Debt versus equity
· Primary versus secondary
· Over the counter (OTC) versus Exchange
· Money Market versus Capital Markets (maturity)
For example, for a share of GE common stock that was initially issued twenty years ago, how would you categorize it using the four categories listed above. Same question for a U.S. Treasury bond that will be issued next week.
7. Name two reasons why secondary markets are important (provide liquidity for investors of the securities and establish a price for the securities).
8. Are U.S. Treasuries traded OTC or in an exchange?
9. Define Money Market (short-term debt securities) and Capital Market (long-term debt and equity securities). Later this semester we’ll expand on these definitions.
10. Why have international markets grown in the past 25 years (growth in their collective pool of savings and less regulation than the U.S. markets).
11. Name the four reasons why international financial markets have grown in relation to U.S. financial markets (or why U.S. markets have declined on a relative basis)?
12. What type of financial intermediary is the most important in the U.S. based on dollar amount of transactions flowing between borrowers and lenders?
13. What is the primary source of loaned funds for insurance companies in their role as financial intermediary?
14. Same question for commercial banks?
15. Generally speaking, what are the three roles that financial intermediaries perform for Borrowers and Lenders (low transaction cost, share or alter risk, solve the problem of incomplete information)?
16. Is the lender or borrower more at risk in a transaction (all other factors being equal)?
17. Define the terms Adverse Selection and Moral Hazard.
18. Types of financial intermediaries and at least two examples of each (Depository, Contractual Savings, Investment).
19. Table 2-1 from the standpoint of the differences between financial intermediaries based on their source and use of funds.
20. Why do life insurance companies tend to invest (loan) more long term than banks?
21. Fire and casualty insurance companies have a need for liquidity in their investments? Why?
22. As measured by assets has the market share of commercial banks risen or declined in comparison to other financial intermediaries during the past 25 years in America? Why? How is this trend “masked”?
23. Name two general reasons for regulation of financial markets and financial institutions.
24. Who regulates insurance companies in the U.S.?
25. Name the six ways that regulators regulate the financial industry. Of the six ways which one is no longer used and why?
26. Read and comprehend the chapter two Summary.
I miss being an English major.