Economics Case Study True/False

Because bank funding markets are global and have at times broken down, disrupting the provision of credit to households and businesses in the United States and other countries, the Federal Reserve has entered into agreements to establish central bank liquidity swap lines with a number of foreign central banks. Two types of swap lines were established: dollar liquidity lines and foreign-currency liquidity lines. The swap lines are designed to improve liquidity conditions in dollar funding markets in the United States and abroad by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress. Likewise, the swap lines provide the Federal Reserve with the capacity to offer liquidity in foreign currencies to U.S. financial institutions should the Federal Reserve judge that such actions are appropriate. These arrangements have helped to ease strains in financial markets and mitigate their effects on economic conditions.

1.The swap lines support financial stability and serve as a prudent liquidity backstop.
True
False

2. Prior to its failure Washington Mutual Bank was not required to maintain certain minimum capital ratios. Regulators were entirely focused on the liquidity conditions of banks.
True
False

3.It is not possible for a bank to be solvent but illiquid.

True
False

4. When WAMU failed the investors who had purchased MBS backed by mortgages originated by WAMU lost all their investment in these MBS because the MBS were unsecured liabilities of WAMU.
True
False

5. In 2007 Washington Mutual Inc. was unable to raise tier 1 capital. This was because its subsidiary Washington Mutual Bank was already insolvent by the fourth quarter of 2006.
True
False

6. According to the FCIC report WaMu was forced to write off $1.9 billion for the fourth quarter of 2007 and another $1.1 billion in the first quarter of 2008, mostly related to its portfolio of option ARMs. These write-offs reduced the bank’s capital levels.
True
False

7. Subprime assets lost value rapidly between 2007 and 2009. This lowered the value of banks that had exposure to these assets and financial institutions that had exposure to banks that were exposed to subprime risk. Since the assets were hard to value they were not acceptable as collateral. This made banks illiquid and this scared away the suppliers of bank capital. A liquidity crisis turned into a credit crisis for many financial institutions such as WAMU, Wachovia, Lehman and others.
True
False

8. 1. The amount of funds supplied by money market funds via repo transactions to Lehman Brothers dropped dramatically between 3/7/2008 and 3/14/2008.
True
False
2.94118 points

9. When the value of a bank assets declines this reduces the bank’s capital levels. This makes the bank’s debt riskier. This increases the bank’s cost of equity.
True
False

10. The Federal Reserve’s balance sheet included more than $15 billion worth of asset denominated in foreign currencies as of April 30th 2013.
False
True.

11. According to the Financial Crisis Inquiry Report (FCIC) WAMU mortgage brokers originated option ARMS without understanding the implications these mortgage instruments had on the solvency of the borrowers. Both brokers and households were being duped by the investment bankers in New York.
True
False

12. Fidelity money market funds were lending over $10 billion to Lehman Brothers as of 9/5/2008.
True
False

13. In September of 2008, the FDIC paid JP Morgan Chase to purchase all of the assets of and assume all of the liabilities of Washington Mutual Bank. This was an outright bailout of a private company by the FDIC. What makes this more problematic is that uninsured creditors were compensated by the FDIC.
True
False

14. WAMU managers knew that option ARMS were high risk assets so they sold all of the option ARMS they originated via securitization transactions. They did not own Option ARMS in the fall of 2008.
True
False

15. The Board of Governors of Federal Reserve objected to Citigroup’s capital plan in its 2014 Comprehensive Capital Analysis Review because Cititgroup had excessive exposure to the debt of Greece and other European countries that were in fiscal difficulty.
True
False