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UW-Madison ECON 102 - The Inside Job

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Econ 102 1st Edition Lecture 21Outline of Last Lecture I. General InfoI. The Great RecessionII. 14.4: Interest Rates and How they Change Investment Output (GDP)III.14.5 Monetary Policy Challenges for the FedIV. Film GlossaryOutline of Current LectureI. The Inside JobCurrent LectureI. The Inside Joba. Using derivativesi. $50 trillion unregulated marketii. Tried to regulateiii. Larry Summersb. Securitization Food Chaini. the people who make the loan are no longer at risk of the person not payingii. Collateralized Debt Obligations CDO’s 1. popular with retirement because of AAA rating (best)iii. Rating Agencies paid to ratec. Investment BanksThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.i. banker makes more money when giving out supreme loans(poor) because of the high interest ratesii. resulted in the biggest financial bubble in history1. huge increase in housing prices a. 1970’s and 1980’s small increasesb. effectively doubled in 2006/20072. led to hundreds of billions of dollars of profitsa. wasn't real income, money created by the sys-temb. basically a global Ponzi Schemeiii. Investment Bank Leverage1. 33:1 2. scary hight3. Credit Default Swapsa. unregulatedi. didn't have to keep specific amounts on reserveb. worked like an insurance policyc. paid quarterly premiumd. if goes bad would be paid to make up for lossi. HOWEVER, allowed many people to in-sure the same CDOii. House example:1. If 20 people are paying insurance on one house, and it burns down, the number of people with “losses” is huge- big problemiv.Has financial development made the work riskier? (Rajan)1. greater incentives to take risks that could destroy firms or the entire financial system2. Make an extra 2-10 million a year by putting your in-stitution at risk, when you're not responsible for losses?a. Most took the betb. Lehman Brothersi. CEO- Richard Fuldii. 6 jets and a helicopteriii. own elevator to bring him to his flooriv.type A personalitiesv. Psychological Study1. when motivated by money, the same part of the brain is stimulatedas cocaine2. all the largest financial firms had upper management in drug use, prostitution, etc.v. Goldman Sachs1. Henry Paulsona. highest paid CEO on Wall Streetb. Took job as Secretary of Treasury2. bought 22 billion dollars of credit default swapsa. insured themselves against loss of their cus-tomers b. the more money their customers lost, the more money they madec. to courti. duty to act in the best interest of the clientii. doing the opposite of that- “selling secu-rities to customers that the firm thinks iscrap”1. then are determined to bet against it2. not disclosing it to the person they are selling it tovi.Moody’s, S&P, and Fitch1. made millions/billions on these ratings2. the more AAA ratings they gave the more money they got3. Justifying them as


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UW-Madison ECON 102 - The Inside Job

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