Lecture 12 D2L 2011

Lecture 12 D2L 2011 - Fin 320 The Cost of Buying Time:...

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Fin 320 The Cost of Buying Time: Lessons from the Thrift Debacle Deposit Insurance Reform- When Half a loaf Is Better The Promise and Limits of Market Discipline in Banking Derivative Examples Lecture 12
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The Cost of Buying Time: Lessons from the Thrift Debacle by James B. Thomson The collapse of the Federal Savings and Loan Insurance Corporation's (FSLIC) deposit insurance fund, coupled with the cleanup of the thrift industry, ranks as one of the greatest financial disasters of our time. Around $200 billion (in 1990 dollars) will have been spent to honor the claims of depositors in closed thrifts and to dispose of failed-thrift assets.
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Brief History; 8 Years 1) The economic insolvency of the FSLIC occurred early in the 1980s 1) The cost of cleaning up the FSLIC's balance sheet reached $100 billion as early as 1982 2) Official recognition of the FSLIC's financial problems did not begin until 1987, when Congress authorized $10.8 billion in new funding 3) Recognition of the FSLIC's irremediable insolvency did not occur, however, until
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Problems of the thrift industry in the 1980s combination of record-high interest rates in the early years of the decade and the structure of thrift institution asset and liability portfolios. Traditional thrift portfolios, which consist of long-term fixed-rate loans financed with short- term liabilities (principally deposits) This interest rate risk is extremely vulnerable to sudden, unexpected increases in interest rates.
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Capital Forbearance Rather than confronting the emerging problems of the industry early and vigorously by enforcing existing capital standards, regulators and policymakers instead poured their energy into papering over losses They hoped that lower interest rates would restore the industry's health and reduce the ultimate cost of resolving the deficit in the FSLIC's insurance fund.
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bet was not symmetric What happens when rates decrease? What happens when rates increase?
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This document was uploaded on 10/26/2011 for the course FIN 320 at DePaul.

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Lecture 12 D2L 2011 - Fin 320 The Cost of Buying Time:...

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