What was the cause of the financial crisis of 2008?
Complex financial institutions, sophisticated finance instruments and global financial integration that quickly transmitted financial shocks (Bernanke).
What are mortgage backed securities?
Also known as MBS, they are financial instruments that derive their cash flow and/or value from pools of mortgages.
How were MBS used prior to the financial crisis?
MBS were used to finance the mortgages that were pooled in the security. The security was backed by the mortgage payments and the collateral of the real estate.
What are government sponsored entities?
Also known as GSEs, they are federally sponsored agencies that were historically privately owned and publicly chartered orgs that were created by acts of Congress to support a specific public purpose.
What is their significance in relation to the financial crisis?
They provided liquidity for banks as a counterparty for MBS.
Which hedge fund filed a lawsuit against Jacob Lew (Secretary of the Treasury)?
What was the hedge fund's claim against the Treasury Department?
Due to the Treasury's conservatorship of Fannie Mae, the Treasury took steps to benefit from Fannie Mae's return to profitability at the expense of shareholders.
What are mortgage-backed pass-through securities?
They are created when mortgages are pooled together and sold as undivided interests to investors. Usually they have the same loan type, similar maturities and loan interest rates.
What is the duty of a central bank?
To respond to a sharp increase in the demand for cash or equivalents by private creditors.
How do central banks create liquidity?
By making cash loans secured by borrowers' illiquid but sound assets.
How do central banks make decisions on which institutions to extend credit to?
Central banks usually choose institutions whose liquidity issues stem from market pressures as opposed to underlying solvency concerns.
How has the Federal Reserve managed the aggregate level of reserves in the banking system?
Through open market operations that include controlling the federal funds rate and providing a source of revenue through the discount window.
What is the TAF?
Term Auction Facility. Allows the Fed to offer predetermined amounts of discount window credit through an auction every 2 weeks to eligible borrowers for 28 day terms.
What is the TSLF?
Term Securities Lending Facility. Let primary dealers exchange less-liquid securities for Treasury securities for 28 day terms at an auction determined fee. This facility closed in 2010.
What is the PDCF?
Primary Dealer Credit Facility. It allowed the Fed to let primary dealers borrow at the same rate as depository institutions at the discount window and have borrowing secured by a broad range of investment-grade securities. It was closed in 2010.
What is the issue of moral hazard in relation to central banks?
If market participants believe that central banks will take corrective measures when financial stress develops, they have less incentive to adequately manage liquidity risk and more incentive to take risks.
What is quantitative easing?
Also known as QE, it is when a central bank purchases financial assets from other private institutions, injecting a predetermined amount of money into the economy, increasing the excess reserves of commercial banks and decreasing the supply of the assets purchased. This decreased supply raises the price of those assets which decreases their yield.