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Week 8 PHL295

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University of Toronto St. George

Week 8 October-30-13 9:22 AM Interlude: the 2008 Financial Crisis (Financial Ethics) (Continued)  May 1999 Glass- Stegal Act: US Government replace the Glass Stegal Act instituted the division between Commercial Banking (hold consumers funds) and Investment Banking (institutions people use to invest their funds o We want Commercial Banking to be much more of a risk adverse that investment banks o The division ensured that if something went wrong with investments made by investment banks, commercial banking operation (and therefore consumers) would not be affected o The repeal of the act made consumer capital available to investment banks for risky investments (Commercial banks had an incentive to invest if they had a more money than needed for the day of the operation) o NASDAQ created to exchange dot com stocks o When the dotcom bubble burst government lowered their interest rates to stop recession  2004- Government a decision to increase debt to capital from 12:1---30:1 (leverage) o The bankers thought that it just wasn’t enough to lend the candies lying on their shelves o They decided to repackage candy loans into collateralized debt obligations (CDOs) and pass on the debt to another candy shop  2007- Landslide begins: the financial market could not solve the subprime crisis (the recession) on its own and the problems spread across US o The interbank market froze largely due to prevailing fear of the unknown banks  2008- the failure of CDO tranches- those tranches now began to fail by the hundreds o Bear Stearns: gets Fed funding as shares plummet  The financial crisis of 2008 has taught us that the confidence of the financial market, once shattered cannot be quickly restored  A liquidity crisis can very quickly turn into a solvency crisis for financial institutions  Every crisis in the past, markets have come out strong to forge new beginnings  to Blame- the government, the institutions, CEOS o much m
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