Class # 7
Strategic Capital Management Case
-Market value of Ubid on Dec 9: 326.4M.
-Market value of Creative Computers: 232.9M
-But CC owns 7.330M of Ubid shares = 80% stake.
-So market value of CCs stake in Ubid
The Housing Market
Class # 12
Today: A More Micro Look at Housing
Market During the Bubble
Underwriting standards and the rise in
Credit supply and house price appreciation in
subprime vs. prime zip codes.
The role of
Stress Tests and GoodGood
Class # 20
Stress Tests: Overview
Feb 25 2009: Fed, FDIC and OCC
to examine 19 largest bank
holding cos ($100B and above);
test ability to withstand adverse
Class # 25
Historical perspectives on compensation in finance.
The economics of superstars.
A story for high levels of pay in finance?
Cheng, Hong and Scheinkman: Yesterdays
The Financial Crisis
In-depth treatment of the crisis that began in August 2007:
events, causes, policy responses.
Focus on financial-market aspects: this is a finance course.
What I can do best,
Deleveraging II: The Shadow
Class # 18
Collapse of Market for Asset-Backed
Securities A Central Feature of Crisis
Aggregate U.S. Security Issuance ($ bn)
Inv. Grade Corp. Bon
The Optimal Conduct of
Monetary Policy with Interest
Class # 23
The Mission of Central Banks
Modern view: price stability is paramount goal.
Historical view: financial stability also a core mission.
There are a few key points one should take from the Diamond Dybvig model.
First, the model oers an explanation as to why demand deposits and banks
exist to provide risk sharing and liquidity. (Note tha
Debt Overhang and Risk Shifting
Consider a rm with the following balance sheet: Cash on hand (C) is
50. Short-term bank debt (B) due at time 1 is 20. Public debt (D) is 100, of
which 20 is due at time 1 and 80 is due at t
Deleveraging I: The Banks
Class # 17
Today: How Do Subprime Losses
Translate into Reduced Lending by Banks?
As a matter of theory/calibration: what do you predict?
Empirical evidence on the effects.
Interesting contrast to keep
TARP TALF and Legacy
Class # 19
Friday October 3, 2008: $700B TARP
Legislation Passes Congress
Original Paulson plan: use money to buy
toxic mortgage assets from banks.
Fire-sale premise: can pa
THE FINANCIAL SYSTEM AND THE
Course Introduction and Overview
Develop an understanding of the modern financial system and of the
central banks role in it.
Banks, broker-dealers, money funds, credit
THE DEBT OVERHANG
Class # 2
Fundamental Question: Why is Financial
Non-financial firms often use little debt in spite of
apparent tax benefits. Why not?
Direct costs of bankruptcy (lawyers fees, etc.)
Class # 3
Internal vs. external equity distinction: Investment mostly financed
by retained earnings, debt and increases in payables. Net new
equity issues play small
AND BANK RUNS
Class # 4
Intermediaries and Short-Term Debt
A central characteristic of financial firms is that they
engage in liquidity creation, or maturity
Fund themselves heavily with sh
THE LIMITS OF
Class # 8
Other Peoples Money
A key feature of arbitrage: its often done by pros who
manage other peoples money, e.g., mutual funds,
hedge funds, bank and I-bank trading desks.
On one hand, pros have m
Strains in Credit Markets
Class # 14
The First Phase of the Crisis: Chronology
July 31, 2007: Bear Stearns liquidates two hedge funds investing in
August 9: BNP Paribas halts redemptions on three inv
Class # 21
Policy options at the zero lower bound.
Pure quant easing: increase reserves
Buy foreign assets; try to depreciate own
Credit easing: try to change risk/liquidity
Banks And Monetary Policy
7 March 2011
7 March 2011
1 / 20
The Macro approach to monetary policy
quick reminder of IS-LM
cash in advance (CIA) model
Operational approach to monetary policy
JP Morgan and Bear Stearns
Class # 15
Sources of vulnerability for Bear Stearns
and dealer firms in general.
Consequences for the financial system if
What should the Fed do?
Sources of Vulnerability
Prelude to the Crisis:
Class # 11
Will spend much of the rest of the course on specific details and
mechanisms of current crisis.
c rrent crisis
Consequences of Lehman s
Class # 16
Lehman Files Chapter 11 on September
Largest bankruptcy in U.S. history, with assets over
S&P down by 4.7%; S&P financials down by 10.6%.
LIBOR-OIS from 86.6 b
Japan and Sweden
Class # 10
Consider the Following Problem
Bank X has $1.6T of book assets, $1.45T of
liabilities, $150B of book equity.
So capital ratio is 9.38%: appears to be well capitalized.
But bank accounting practices a
Asymmetric Information and Bank Runs
Section Notes Econ 1759
The empirical evidence suggests that rms are reluctant to issue new equity
to nance new investment projects and that there is a big dierence between
internal equity (retained ea
A Macro Prudential Approach
to Financial Regulation
Class # 22
What is meant by a macro-prudential
What are key elements of such an approach?
Where do things stand in Basel III process?
The Great Depression
Class # 9
Plan of Attack
Basic facts on output, prices, labor
Hypotheses about causes
Stock market crash
Asymmetric Information and
Class # 3
Internal vs. external equity distinction: Investment mostly
financed by retained earnings, debt and increases in payables.
Net new equity issues play small
Banks and Monetary Policy
Class # 5
Today: How Monetary Policy Works (In
Normal Times); The Role of Banks
Questions to Address:
1. How does Fed implement monetary policy?
2. How does Fed policy in turn affect interest rates?