Final Exam 2171Lectures:(1) The Age of Greenspan IAlan Greenspan; Federal reserve chairman, he kept this position for 19 years-AGis tapped to be FRC in 1987, he was in charge of regulation of the government. He does not believe in regulation so instead in a way he sets to dismantle the regulation.Exxon Valdez Oil Spill, 1989-March 24th, 1989; Exxon Valdez, an oil tanker, making its way from Alaska to California. It had on board 750,000 barrels of oil. Captain drank, fell asleep, steered his ship into rocks, the ship begins to sink.-People were outraged, Exxon had a public relations disaster on their hands. If they don’t do anything about this they’re on the hook for millions of dollars in clean-up costs and law suits.-Exxon is in a bind. They call up JP Morgan, and asks JP for some help. Exxon asks JP for a loan, since law suits will be mounting and clean ups will cost a lot.-they asked for 4.8 billion dollars in a line of credit. JP provides this to Exxon in case Exxon needs it.-This puts JP now in a bind,since it has 5 billion more dollars in liabilities on its book. They must report this loan, banks have to adhere to reserve requirements. They have to have X amount of money in case people ask for their money back.-This 5 billion will prevent them from handing out other loans. They need to eradicate this dept from their books. They think of creating insuranceon that loan.-They go out to look for someone who is willing to provide insurance on this loan. No one expects Exxon to default since it is a big company (insurance for the loan would be like free money), problem with JP is this doesn’t let them hand out anymore loans and they can’t collect that interest on possible loans.-JP must convince Greenspan that they have eliminated this risk via the insurance. The reason there are reserve requirements so banks don’t over extend themselves.Morgan says they can’t overextend themselves in this since they have collected insurance on the loan.-Greenspan cuts a deal with JP, Greenspan is convinced, they can now lend more loans. They have transferred the risk, in so doing they were able to convince FRC that they have eliminated risk-This was the early birth of the Credit Default Swap-Credit Default Swap: it was a means of companies avoiding the strict reporting requirements,. Insurance companies clue in this new revenue stream of issuing insurance to banks, sitting down collecting insurance premiums doing nothing.AIG -Positions itself as a company that will provide insurance on companies who want to take out insurance on risky depts. They slowly move into the process of offering insurance and helping companies wipe risk off their books according to the federal regulators.-these big companies just want to get out of the reserve requirements, and AIG pops up as a hero for thesecompanies. AIG would just collect the premiums and invest.