The Role of Information Failures in the Financial Meltdown.ppt by handongqp



                BERKELEY, SUMMER 2009
• Disclaimer:
     I’m not a macro-economics expert, but I do know something about the
     economics of risk and uncertainty, and something about markets,
     market failure, and appropriate regulatory response.

• Overview:
     A major source of the meltdown in the financial markets was the result of
     information failures and any “solutions” that did not address the information
     needs would not be viewed as anything more than holding actions that would
     eventually fail.

     Each of these attempted fixes only made the overall situation worse by
     highlighting what we still did not know about the underlying valuations of the
     assets and derivatives at the heart of the financial side of the problem.
• Basic points:
    Original view was this was primarily a "financial" crisis.
    Taking that view, the first proposed remedy was a bailout of
    major financial institutions with some government entity
    using taxpayer funds to buy securities of unknown value
    from supposedly sophisticated money managers.

    Instead we needed to both understand the scope of the
    problem (not just financial assets) and the underlying
    causes. To start, the focus should have been:
     • to resolve the information problems to help evaluate the suspect
     • to assist in the renegotiation of mortgages to help keep
       homeowners in their houses.
•   Introduction
•   Background on Banking
•   Background on Mortgages
•   Background on Derivatives
•   Background on Insurance
•   Background on Ratings Agencies
•   Bailout measures that did not work (and why)
•   Proposed measures that probably will not work
•   Summary/Conclusions
•   Other topics(?)
       Auto industry
•                              (
    Banks and other financial institutions used to hold assets—some cash,
    real estate, securities, and the loans they made to their customers.

• Some still do, but—for the most part—they now are in the business of
  earning fees for originating loans, buying and selling obligations of one
  sort or another, etc.

• On the other side of the ledger, the liabilities of the financial institutions are
  the sums they owe others—the depositors in commercial banks and S&Ls,
  and frequently the deposits of other institutions as well as government

• The basic principle of banking was to know the value of one’s assets and
  liabilities, accurately disclosing this to regulators and the public.
• As the business of banking became more fee-based, the
  functions of loan origination, loan processing, and asset
  management became more separable.

• Home buyers no longer dealt with a local bank that
  would be expected to hold and process their loan into
  the future. Banks provided consumer credit, via credit
  cards, “homeowners’ lines of credit,” and so on, but
  again often did not hold onto the asset.

• So long as the packaging and re-packaging of these
  assets (loans) into financial instruments was done in a
  transparent fashion, the result was mostly positive.
• The major loss from this change was the lack of
  a personal relationship with one’s “banker,” who
  was frequently a respected member of the local

• There were gains in this system as loanable
  funds could more easily flow to growing regions
  and industries, and the entry of non-bank
  financial institutions into some parts of the
  market provided competition that reduced costs
  and eliminated pockets of discrimination.

• “Near banks” and “non-bank banks” became
  common, and regulation was lax.
• An old-fashion fixed-rate mortgage was
    30-year loan on a single-family, owner-occupied,
    primary residence
    For a fixed annual percentage rate
    Held by the lender (traditionally a local bank or
    …and therefore had reasonable fees (“points”)
• Remember that banking became more
  fee-based, so lender and loan processor
  were not always the same entity.
• Specialized lenders emerged (e.g.,
• Two channels for loan origination:
    Lender’s sales organizations
    Mortgage brokers
• Even “simple” variable rate mortgages
  (ARMs) require one to understand:
      Basis for the rate (the “index”)
      The margin (mortgage rate – index rate)
      When it can be reset
      Negative amortization possibilities

• In 2004, then FRB Chair Greenspan
  argued that ARMs were under-utilized and
  the reliance on traditional fixed rate loans
  was costing home buyers money. While
  the second part was technically correct, it
  ignored the increased risk to both
  borrowers and society of an increased
  reliance on variable-rate products.
  (Speech to the Credit Union National
  Association, February 23, 2004) .
• And then there were even more complex versions:
      GPARMs (“Gip-ims”)
      Hybrid ARMs, interest-only ARMs, payment-option ARMs, etc.

Consider the result of a complex, no-
doc mortgage on a home with an
inflated appraisal. The outcome is
that the underlying value of the
property is unknown, the credit-
worthiness of the borrower is
unknown, and the precise terms of
the loan and the stream of payments
are also unknown. This is the exact
opposite of how a reasonable
credit market should operate.
        OF THE PROBLEM ?
• Current mortgage delinquency rates (July 2009):
     6.8% of non-agency prime mortgages
     21% of Alt-A mortgages
     40% of sub-prime mortgages

Fitch Ratings, as reported in Brett Arends,
“Should You Invest In Toxic Assets?”, WSJ,
July 29, 2009

• “Both Mozilo and Sambol were aware as early as June 2006 that a
  significant percentage of borrowers who were taking out stated
  income loans were engaged in mortgage fraud. On June 1, 2006,
  Mozilo advised Sambol in an email that he had become aware that
  the Pay-Option ARM portfolio was largely underwritten on a reduced
  documentation basis and that there was evidence that borrowers
  were lying about their income in the application process. On June 2,
  2006, Sambol received an email reporting on the results of a quality
  control audit at Countrywide Bank that showed that 50% of the
  stated income loans audited by the bank showed a variance in
  income from the borrowers’ IRS filings of greater than 10%. Of
  those, 69 % had an income variance of greater than 50%. These
  material facts were never disclosed to investors.”

 SEC Complaint, SEC v. Mozilo, Sambol & Sieracki,
 CV09-03994, filed June 4, 2009

•   On June 1, 2006, one day after he gave a speech publicly praising Pay-
    Option ARMs, Mozilo sent an email to Sambol and other executives, in
    which he expressed concern that the majority of the Pay-Option ARM loans
    were originated based upon stated income, and that there was evidence of
    borrowers misrepresenting their income.

•   … Mozilo met with Sambol the morning of September 25, 2006 to discuss
    the Pay-Option ARM loan portfolio. The next day Mozilo sent an e-mail to·
    Sambol and Sieracki expressing even greater concern about the portfolio. In
    that e-mail, Mozilo wrote: “[w]e have no way, with any reasonable certainty,
    to assess the real risk of holding these loans on our balance sheet. ... The
    bottom line is that we are flying blind on how these loans will perform in a
    stressed environment of higher unemployment, reduced values and slowing
    home sales.”

SEC Complaint, SEC v. Mozilo, Sambol & Sieracki,
CV09-03994, filed June 4, 2009
“Starting in 2001, when a new wave of
government regulators took over and adopted
a less intrusive attitude, Placid and other
huge home mortgage companies became
aggressive in their pursuit of new loans. They
advertised heavily, especially on the Internet,
and convinced millions of lower- and middle-
class Americans they could indeed afford to
buy homes that they actually could not afford.
The bait was the old adjustable-rate
mortgages, and in the hands of crooks like
Placid it was adjusted in ways never before
imagined. Placid sucked them in, went light
on the paperwork, collected nice fees up
front, then sold the crap in the secondary
markets.” (pp. 152-153)
• “Secondary markets”: Packages of loans
  had been sold to investors for years (e.g.
  via GNMA)
            GNMA PL#042341X DTD 07/01/1980
            R/MD 12.50 06/15/2010 105.00
            (5/26/09) N/A N/A 25,000

• Computerization made it even easier to
  track these.
    But it also made it easier for the packages to
    become more complex.
        Background on Derivatives

• Derivatives can be economically useful
      Provide flexibility to buyers/sellers (lenders/borrowers)
      Their value depends on the value of the underlying assets (claims)
      But the asset values themselves can be uncertain (hence there is risk)
      Derivatives can range from relatively simple to incredibly complex
• Therefore, derivatives can be “good” or “bad” depending on the
      Linkage to underlying assets: STRIPS & GNMA obligations are very
      direct (so much so that some do not consider them to be derivatives).
      I probably should refrain from making simplistic value judgments, but I
      won’t. But there are a number of unstated caveats and qualifications to
      much of what follows.
      I’m not the only one using this terminology: “bad assets”, “bad bank”,
                  A “Good” Derivative

• First, a relatively simple example with little or no risk:
       STRIPS is the acronym for Separate Trading of Registered
       Interest and Principal of Securities.
       STRIPS let investors hold and trade the individual interest and
       principal components of eligible Treasury notes and bonds as
       separate securities.
       STRIPS are popular with investors who want to receive a known
       payment on a specific future date.
       STRIPS are called “zero-coupon” securities. The only time an
       investor receives a payment from STRIPS is at maturity.
       STRIPS are not issued or sold directly to investors. STRIPS can
       be purchased and held only through financial institutions and
       government securities brokers and dealers.

            More on STRIPS

• In the old days a bond • Now they are all
  was a combination of     “electronic entries”
  “return of principal”
  and “coupons”
  (usually one every 6
           More on STRIPS
• A financial intermediary (bank, brokerage house,
  etc.) would combine various coupons from a
  number of bonds so that an investor could find
  the maturity and rate of return desired
  independent of what the borrower had originally

    It was a straight-forward operation to
    determine the value with a computer.
    Also, there was no physical “coupon” as such,
    just the computer entry.
    The intermediary charged a small fee to
    record and manage the transactions.
         A “Bad” Derivative - 1

• Tom Wolfe’s “Giscard” (from Bonfire of the
  Vanities, 1987)
    The (fictional) Giscard Bond, issued by the
    French government, had coupons and
    maturity value linked to the French Franc
    value of a fixed weight of gold.
    “So as the price of gold when up and down,
    so did the value of the Giscard.” (p. 65)
    “The only real problem was the complexity of
    the whole thing.” (Ibid.)
           “Bad” Derivatives - 2

“Simply put derivatives are the weapon of choice
for gaming the system….Derivatives provide a
means for obtaining a leveraged position without
explicit financing or capital outlay and for taking
risk off-balance sheet, where it is not as readily
observed and monitored….Viewed in an
uncharitable light derivatives and swaps can be
thought of as vehicles for gambling; they are, after
all, side bets on the market.”

--Richard Bookstaber, author of A Demon of Our
Own Design, in congressional testimony.
           “Bad” Derivatives - 3

“Even when derivatives do allow financial risks to
be transferred, that is not always a good thing.
John Kay, a leading Scottish economist, noted
recently that he used to teach — along with most
other economics professors — that derivatives
allowed risks to be transferred to those better able
to bear them. But, he added, experience had
shown that to be wrong. Now, he said, he teaches
that derivatives allow risk to be shifted from those
who understand it a little to those who do not
understand it at all.”
--Floyd Norris, New York Times, June 25, 2009.
        “Uncertain” Derivatives --

 You decide whether they are good or bad

• Other examples of derivatives
    Puts, calls, stock options
    SDRs, ECUs (pre-Euro bundles of currencies)
    Commodity futures
   CMOs: Combining Mortgages
        and Derivatives
• Collateralized mortgage obligations
  (CMOs) are bonds based on home
  mortgages with a twist that the bonds are
  categorized into different tranches to
  redistribute the risk of mortgage
  prepayment and mortgage default.
    “Tranche” is French for “slice”, and is used in
    finance to refer to one portion of a group of
    related securities.
• More generally, CDO (…Debt…)
   CDOs: Combining Mortgages
        and Derivatives

• Why some CDOs are
  probably worth ZERO:
   Higher yield tranches
   have higher risk (this
   should not be a big
   surprise to anyone)
 CDOs: A Special Purpose Entity—
         Initial condition
                                                     Assuming 3
                   Assets             Liabilities
Calculation                                          “Equity
                                 $10 million @ 31%   tranche”
              100 mortgages x     $40 million @ 6%   tranche
 $8.0 mil     $ 1 million each
              = $100 million
 -2.5 mil
 -2.4 mil     (say at 8% each)    $50 million @ 5%
        The Special Purpose Entity—
             A few years later
                                                        Assuming 3
                    Assets              Liabilities
 Calculation                                            “Equity
                  $20 million      $10 million @ 31%    tranche”
50% refinance                       $40 million @ 6%    Medium-risk
  or pay off      $30 million                           tranche
                (hopefully cash)     gets $30 million
    loans                                               (75%
 foreclosed;      $50 million       $50 million @ 5%
 60% of that        (cash)                              Low-risk
                                                        (full recovery)
So… The CDOs are assets on someone’s (bank, financial
  institution) balance sheet and may be truly worth zero
      (depending on which tranche they represent)

                Assets            Liabilities
                                                   Possibly held
                             $10 million @ 31%
              $20 million                              by the
                              $40 million @ 6%
                                                  institution (i.e.,
              $30 million      gets $30 million     not sold to

              $50 million     $50 million @ 5%
                                (full recovery)
      Background on Insurance

• To prevent insurance from being little
  more than gambling, one needs to have
  an “insurable interest”
• The cost of insurance is:
   (The probability of the loss) x (the expected
   amount of the loss)
   Plus a “risk premium”
   Possibly plus any transactions costs
      More on Insurable Interest

• (From an economist who is a fan of murder
    To prevent (additional) incentives to murder, one can
    not buy a life insurance policy on a stranger. You can
    purchase insurance on a relative, a business partner,
    This has been the plot device in a number of
    mysteries (often in the form of a “tontine”).
     • R. L .Stevenson, The Wrong Box
     • A. Christie, 4:50 from Paddington Station
     • And, of course most famously, The Simpsons.
    Similar rules for other types of insurance
      More on Insurable Interest (actually a
      digression on the importance of “The
          Simpsons” in modern culture)
• Grampa and Mr. Burns enter into a tontine
  during World War II, involving a treasure of
  antique paintings stolen from a German
  castle. When the two of them become the
  only surviving members, they compete for
  the rights to the prize. Eventually they both
  lose once the US State Department
  interferes and takes the paintings back to
  the German baron who is the rightful
  owner. (From Wikipedia entry for

Season 7, episode 22: "Raging Abe Simpson and His Grumbling Grandson in
‘The Curse of the Flying Hellfish’”. Originally aired April 28, 1996.
Insurance—the Good and the Bad

• Again, the “good” and the “bad”, but this
  time with the “uncertain”—
    Good: Life insurance, car insurance, maritime
    insurance, etc.
    Bad: Tontines, “bucket shops”,
    sports betting (?)
    Uncertain: Credit default swaps
                    “Bucket Shops”
                   “Bucket shops”
• Formally, a bucket shop is a firm that “books" (i.e.,
  takes the opposite side of) retail customer orders
  without actually having them executed on an
• From the Financial Times:
      The bank panic of 1907 is remembered for J.P.
      Morgan forcing all the bankers to stay in a room until
      they agreed to contribute to fixing the crisis. What has
      been forgotten is one major cause of the crisis –
      unregulated speculation on the prices of securities by
      people who did not own them. These betting parlours,
      or fake exchanges, were called bucket shops
      because the bets were literally placed in buckets. The
      states responded in 1908 by passing anti-bucket shop
      and gambling laws, outlawing the activity that helped
      to ruin that economy. (March 30, 2009)
• These laws were pre-empted by the Commodity
  Futures Modernization Act of 2000.
   What is a Credit Default Swap?

• A contract between two parties, in which one
  party makes periodic payments, while the other
  agrees to pay a sum of money if a certain event
  occurs. A CDS takes place in the world of
  financial markets, and the "event" that triggers
  the payoff is when a credit instrument, such as a
  bond or loan, goes into default.
• Investors use CDSs primarily for two reasons:
    as an insurance vehicle to hedge an investment in a
    as a gambling mechanism to make a profit if the
    company fails.
     Credit Default Swap valuation

• CDS pricing: The spread is an annual amount that the
  buyer must pay to the provider of the CDS over the
  length of the contract, expressed as a percentage of the
  notional amount. This is very much like the premium paid
  in insurance. In general, a company with a higher CDS
  spread is considered more likely to default by the
  market, and a higher fee would be charged to protect
  against this happening.
• Other valuation issues: the length of the contract, the
  amount of protection, “health” of the issuer (as well as of
  the covered entity).
• Partial payments (to “counter-parties”) required as
  underlying conditions change.
     Credit Default Swap “markets”

• No organized exchange; therefore, no
  clear understanding of amount
• Gretchen Morgenson estimated $30 billion
  outstanding in Jan. 2009.
      Some estimate that as much as 90% were not
      used for hedges.
      But there may have been offsets included in
      this estimate.
 Background on Ratings Agencies

• Standard & Poor’s, Moody’s & Fitch
• “[If the ratings agencies had done a better
  job], we wouldn’t be having this
 Larry White (NYU), on NPR Planet Money, June 5, 2009.
Bailout measures that did not work
           (and why)

• Banks
   Original plan to take “bad” assets off the
   books—no credible way to value them
   Preferred stock—viewed as just another
   Stress tests
    • Odd assumptions about revenue projections, etc.
      (WSJ, May 28, 2009)
    • As of June 5, 2009, it appears as though even the
      FDIC does not accept the results.
 Bailout measures that did not work
            (and why)
• More on the “too big to fail” logic
     Size = political power (even noticed by the WSJ)
       • “Congress Helped Banks Defang Key Rule” (June 3, 2009) about
         “mark-to-market” and “Banks Try to Stiff-Arm New Rule” (June 4,
         2009) off-balance sheet accounting
       • “Secret Sanctions” (WSJ, July 17, 2009)
           – “Bank of America Corp. is operating under a secret regulatory sanction
             that requires it to overhaul its board and address perceived problems
             with risk and liquidity management, according to people familiar with
             the situation…. Citigroup Inc. has been operating since last year under
             a similar order with the Office of the Comptroller of the Currency,
             according to people familiar with the matter. The company recently has
             been negotiating with the Federal Deposit Insurance Corp. about
             entering into a similar agreement with that agency, these people say….
             Spokesmen for Citigroup and the FDIC declined to comment.
Bailout measures that did not work
           (and why)
• Mortgages
    Refinance plans too small, poorly implemented
     • 17,000 loans modified through May 31, 2009 (NPR)
     • “Some 9% of eligible borrowers have received trial
       modifications under the Obama administration's ambitious
       effort to help struggling homeowners, according to data
       released by the Treasury Department on [Aug. 4, 2009].”
       Maya Jackson Randall & Jessica Holzer, WSJ
    Ignored differing incentives of originators, servicers,
    and holders of loans
    Exacerbated by revision of mark-to-market rule
     • (technical digression needed here)
Bailout measures that did not work
           (and why)
• Mortgages
    Confounded by second mortgages and homeowner
    lines of credit (HLOC)
     • Second mortgages & HLOC are profitable for lenders. But
       they are subordinate to first mortgages. If a lender and
       borrower want to re-negotiate a first, they may need the
       holder of the second (or HLOC) to also take a write-down in
       order for the borrower to afford the revised first.
     • Recognizing this, the “book” value of the second should be
       reduced, forcing the bank to incur additional losses.
     • Lesson: “Mark-to-market” rules really do matter.
     Credit Default Swap “markets” (1)
•   Proposed solutions:
      Buyers should take the hit.
       • “If you live in a house and you don’t buy reputable insurance and a
         fire burns it down, it’s your fault.”
      Unwind the contracts (“inversion”)
       • Insurance premiums would be refunded to buyers of credit
         protection from the entity that wrote the initial contract. And the
         seller would no longer be under any obligation to pay if a default
         occurred. The premium repayments would be made over the same
         period and at the same rate that they were paid out. If a contract
         was struck three years ago and charged quarterly premiums, the
         premiums would then be refunded quarterly over the next three
       • Counter argument from an insider: “Unwinding CDS would harm the
         integrity of financial market. Kind of like if I place a bet with a bookie
         that doesn't pay, the bookie can't pick and choose after the fact
         which games he wants to payout on and which he wants to cancel.
         Not without risking have customers fleeing.”
   Credit Default Swap “markets” (2)

• Proposed solutions (continued):
   Use bailout funds to pay counter-parties.
   (Longer-term) Create exchange(s) or
   clearinghouse(s), regulator, reserve
    • Worry about the exemptions!
     Credit Default Swap “markets” (3)

• CDS – what we actually did (difficult to document)
      AIG: loans at 18% p.a.
        • Possible rationales: hide transfers to counter-parties, especially
          foreign banks & institutions; prop up insurance subsidiaries
      Bear Stearns: guaranteed contracts
      J. P. Morgan: -------”---------

CW (early July 2009): Actually, these last two seem to have worked reasonably
well, at least when compared to the AIG bailout. But were they worth the cost?

CW (late July 2009): “The dozens of insurance companies that make up AIG
show signs of considerable weakness even after their corporate parent got the
biggest bailout in history, a review of state regulatory filings shows.”
NY Times, July 30, 2009
 Proposed measures that probably
      will not work (and why)
• Use Treasury/Fed funds to assist private entities to buy troubled
      (I guess) the theory is that if one only has to put up (say) 5-20% of the
      purchase price, the “correct” valuation isn’t too much of an issue.
      But this leads to its own set of strange incentives:
        • Some banks are prodding the government to let them use public money to
          help buy troubled assets from the banks themselves. Banking trade groups
          are lobbying the Federal Deposit Insurance Corp. for permission to bid on
          the same assets that the banks would put up for sale as part of the
          government's Public Private Investment Program.

        • “PPIP was hatched by the Obama administration as a way for banks to sell
          hard-to-value loans and securities to private investors, who would get
          financial aid as an enticement to help them unclog bank balance sheets. The
          program, expected to start this summer, will get as much as $100 billion in
          taxpayer-funded capital. That could increase to more than $500 billion in
          purchasing power with participation from private investors and FDIC
          financing.” (WSJ, May 27, 2009)
What is wrong with letting the banks be
both buyers and sellers of toxic assets?
Some critics see the proposal as an example of banks trying to profit
through financial engineering at taxpayer expense, because the
government would subsidize the asset purchases.

    "To allow the government to finance an off-balance-sheet maneuver that
    claims to shift risk off the parent firm's books but really doesn't offload it is
    highly problematic," said Arthur Levitt, a former Securities and Exchange
    Commission chairman who is an adviser to private-equity firm Carlyle
    Group LLC.

    "The notion of banks doing this is incongruent with the original purpose of
    the PPIP and wrought with major conflicts," said Thomas Priore, president
    of ICP Capital….

One risk is that certain hard-to-value assets might not be fairly priced if
banks are essentially negotiating with themselves. Inflated prices could
result in the government overpaying. Recipients of taxpayer-funded
capital infusions under the Troubled Asset Relief Program also could
use those funds to buy their own loans. (WSJ, May 27, 2009)
 Proposed measures that probably
      will not work (and why)
• CDS or derivatives “clearinghouse”
    Too many possible exemptions
     • Profits for the “custom” CDS are much higher than for the
       “plain vanilla” ones
     • There are a number of facilitators and intermediaries, all of
       whom make large fees
    Intermediaries will be “on the hook” and someone has
    to insure and/or regulate them
     • “ICE Trust” (in NYC) wants this business
    CDS contracts are inherently easy to manipulate
     • WSJ, June 11, 2009
    Proposed measures that probably
         will not work (and why)
•   Create “database” to help evaluate mortgages and ABS
       “To deal with the problem, issuers of asset-backed securities should provide
       extensive detail in a uniform format about the composition of the original pools
       and their subsequent structure and performance, whether they were sold as
       SEC-registered offerings or private placements. By creating a centralized
       database with this information, the pricing process for the toxic assets becomes
       possible. Making such a database a reality will restart private securitization
       markets and will do more for the recovery of the economy than yet another
       redesign of administrative agency structures.”
       (Ken Scott & John Taylor, WSJ, July 21, 2009)
       “Insufficient data are collected on individual loans, and often the data are of
       questionable accuracy or timeliness, so the analysis of mortgages and other
       types of loans which have been sliced and diced through multiple levels of
       securitization will be subject to substantial error. Accordingly, the valuation of
       such ABS will be highly suspect, even if the data reside in a centralized
       database…Rather than using securitization to shift individual loans toward their
       funding source, public policy should seek to encourage lenders to retain
       ownership of the loans they make.”
       (Bert Ely, WSJ, July 27, 2009)
 Proposed measures that probably
      will not work (and why)
• Current proposal to overhaul financial regulation
     (See earlier slide on political power of financial institutions)
     Suspicion of giving the FRB more power
      • “Treasury Secretary Timothy Geithner blasted top U.S. financial
        regulators in an expletive-laced critique last Friday as frustration
        grows over the Obama administration's faltering plan to overhaul
        U.S. financial regulation, according to people familiar with the
        The proposed regulatory revamp is one of President Barack
        Obama's top domestic priorities. But since it was unveiled in June,
        the plan has been criticized by the financial-services industry, as
        well as by financial regulators wary of encroachment on their turf.
        Mr. Geithner, without singling out officials, raised concerns about
        regulators who questioned the wisdom of giving the Federal
        Reserve more power to oversee the financial system. Ms. Schapiro
        [SEC] and Ms. Bair [FDIC], among others, have argued that more
        authority should be shared among a council of regulators.”
        WSJ, Aug. 4, 2009
     Need more specific guidance!
       Summary or Conclusions
• More disclosure needed
    “Off balance sheet” entries
    Nature of CDS and derivatives
    Property and asset (re)valuations
    Strong “mark-to-market” rules
• Other options
    Return to traditional banking (at least in part)
    Improved regulatory system
     • “Systemic regulator”
      Summary or Conclusions

“Certainly confidence is crucial to the open
and fair operating of markets. [Bailouts did
not build confidence….] What confidence is
created by is a clarity of the problem.”

Interview with Gretchen Morgenson on
NPR’s “Fresh Air”, June 9, 2009
      Questions & Other topics (?)

•   Q&A
•   Stimulus
•   Auto industry
•   Education
              Additional sources
• Our paper: (
  ~bigyale/financial_crisis.html )
• New York Times (Gretchen Morgenson; Floyd
  Norris; even Ben Stein)
• Khan Academy sections on “Credit Crisis”
• Wikipedia (surprisingly good in several areas)
• Planet Money (from NPR)

         Thanks to Patrick Riley for graphics & editing support.
         Official disclaimer: The opinions or statements expressed herein should not
         be taken as a position of or endorsement by the University of California,

                    BERKELEY, SUMMER 2009

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