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Financial Bubbles


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twentieth century
the period from 1900 until 1999
a large amount
an awful lot of
invented or discovered
have come up with
entertaining ways
fun and interesting methods
over-scheduled
excessively busy (too busy)
cavort
Apply oneself enthusiastically to sexual or disreputable pursuits
canoodle
Kiss and cuddle amorously or in a romantic way
diversion
Something intended to distract someone's attention from something more important
decadence
Moral or cultural decline, esp. after a peak or culmination of achievement
self indulgence
an inability to resist the gratification of whims and desires to satisfy ourselves
we whip out a piece of plastic
pay with a credit or debit card
fresh bling bling
a slang term popularized in hip hop culture, referring to flashy, ostentatious or elaborate jewelry and ornamented accessories that are carried, worn or installed, such as cell phones or tooth caps
a noble tradition
a custom worthy of respect that has been passed down through the generations
the evolution of capitalism
the development and progress of the dominant economic system in the world
a new phase is upon us
We have started a new period or age
the age of e-commerce
a period in which buying and selling things through the Internet has come to dominate
An age ushered in by
how a new period or era was started
transformative technology
a kind of technology that changes things in a very deep or profound way; a game changer
seminal companies
companies that strongly influenced other companies that followed
seminal
(of a work, event, moment, or figure) strongly influencing later developments
revolutionary
Involving or causing a complete or dramatic change
burst upon the scene
to appear suddenly and dramatically
shake to its core
to shock or surprise completely
industrial revolution
The rapid development of industry that occurred in Britain in the late 18th and 19th centuries, brought about by the introduction of machinery. It was characterized by the use of steam power, the growt…
high-flying executives
very successful top business leaders
gilded
covered thinly with gold leaf or gold paint
afterthought
An item or thing that is thought of or added later
model of commerce
a way of doing business
harness the power
To bring under control and direct the force of
innovation
invention: a creation (a new device or process) resulting from study and experimentation
underpin
Support, justify, or form the basis for
upheaval
A violent or sudden change or disruption to something
unleashed
Release from a leash or restraint
resurrection
the action of bringing something back to life
despite
in spite of, notwithstanding, regardless of
financial meltdown
Refers to events like steep falls in stock markets, declines in asset values, corporate losses, etc. that hurt the economy and lead to losses for investors
to Financial Institutions and Markets
Sound financial decisions require adequate and reliable financial information.Borrowers, lenders, and those who make financial policy require data on the prices and yields attached to individual loans and securities today and the prices and yi…
Where do financial decision makers go to find the data they need?
(1) debt security prices and yields, (2) stock prices and dividend yields, (3) information on security issuers, and (4) general economic and financial conditions across the entire economy and financial system.
The efficient markets hypothesis (EMH)
Contends that information relevant to the pricing (valuation) of loans, securities, and other financial assets is readily available to all borrowers and lenders at negligible cost.
Asymmetric Information
situation when one party doesn't know enough about the other party to make accurate decisions. This creates two kinds of problems:
Efficient markets and Asymmetric information
Differ in terms of the cost and availability of relevant information flowing to decision makers in the financial marketplace and ultimately affect the prices (values) of all assets.
What Is an Efficient Market?
Market where all pertinent information is available to all participants at the same time, and where prices respond immediately to available information. Stockmarkets are considered the best examples of efficient markets.
The weak form of the EMH
Argues that the current price of a financial asset already reflects all its price and trading volume history
The semistrong form of the EMH
Contends/opposes that the current price of a financial asset already reflects all publicly available and relevant information.
The strong form of the EMH
Argues that the current price of a financial asset already captures all relevant public and private information
Insider trading
It's the trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals with access to non-public information about the company by corporate insiders such as officers, key employees, directors, and large shareholders.
Federal laws for insider trading
Section 10(b) 5 of the U.S. Securities and Exchange Act forbids any "manipulative or deceptive device" in trading securities and other financial assets.
The 3 Efficient markets Hypothesis and Asymmetric information Hypotheiss (AIH)
The AIH does not necessarily contradict the weak and semistrong forms of the
Lemons and Plums
A loan officer (buyer) cannot be sure without incurring substantial costs whether his or her potential customer (seller) is a lemon (sour) or plum (sweet).
Adverse Selection.
A bank that sets one price for all its checking account customers runs the risk of being adversely selected against by its high-balance, low-activity (and hence most profitable) customers.
Solution for Adverse Selection
Enabling customer signaling via a price schedule for different account plans.
moral hazard
the risk that one party to a transaction will engage in behavior that is undesirable from the other party's point of view
Solution for Moral Hazard
Contracts drawn with the appropriate incentives and monitoring
The Law
Some laws and regulations are designed to improve the flow of information between buyers and sellers and to protect the public against deception in valuing financial assets
1933 passed the Securities Act,
requiring companies selling financial assets across state lines to submit
1934 the Securities Exchange Act
Required corporate insiders to follow guidelines in trading the financial instruments of firms with which they are affiliated to avoid excessive profit taking from privileged information. This law also moved to outlaw fraud and misrepresenta…
1940 Investment Company Act
Mutual funds companies must register with SEC and provide reports to the public on their activities and performance.
1970 Securities Investor Protection Act
set up the Securities Investor Protection Corporation (SIPC) to insure an
2000 Fair Disclosure (FD)
This required companies to disclose material financial information broadly/public rather than only to brokers.
2002 Sarbanes-Oxley Accounting Practices Act (SARBOX)
SARBOX makes chief executive officers (CEOs) and chief financial officers (CFOs) of public companies responsible when their firms dispense inaccurate or misleading information about the financial condition of the businesses they manage.
What started to happen to the housing bubble?
Many people were getting mortgages that shouldn't have been given them. Because anyone could buy a house, housing prices started to increase. Mortgages started to go bad, the system started to break down
Leveraging
Banks were borrowing to fund mortgages. Leading up to the crisis, leverage limits were lifted. Reached up to 33:1. Banks became highly indebted.
Credit Default Swaps (CDSs)
Investors pay a quarterly premium and if the CDO went bad, AIG promised to pay investors for the losses. If you didn't own the asset, you bought CDSs as a way to bet agains…
Problems with CDSs
Concentrated the risk into just a few insurance companies. AIG didn't have to set aside any money in the event that CDOs were eventually going to go bad. They didn't think it was possible…
Goldman Sachs
Bought so many CDSs from AIG that when they realized that AIG may fail so they took out insurance against the AIG collapse. Selling so many CDOs but also buying CDSs to bet against them
Bear Sterns (March 2008)
Acquired by JP Morgan Chase for $2 a share. The deal was backed by $30 Billion in emergency guarantee's by the Fed. The US government takes the distressed parts of the banks and then ot…
Fannie and Freddie (September 7th)
Federal takeover. Two giant mortgage lenders on the brink of collapse. They had been set up by the government in a program to facilitate home ownership.
Lehman Brothers (September 12th)
Started running out of cash. Barclay's was the only bank interested in buying it, but they wanted government guarantee's, which the US gov. refused.
Short Term Paper Market
Froze. It was difficult for companies to get a loan for their payroll. Commercial paper market - was depended on for operating expenses
Merrill Lynch (September 14th)
Bought out by Bank of America
AIG (September 17th)
Taken over by the government. Owed $13 Billion to holders of CDSs and it didn't have the money. They were not allowed to declare bankruptcy and were instead bailed out.
AIG Bailout Policies and Effects
Required to pay 100 cents on the dollar to people they owed and were not allowed to negotiate lower prices - Goldman Sachs made a lot of money. Paulson use to be CEO of…
General Bailout Package
Signed by Bush. $700 Billion - taxpayer funded, on top of the money already provided to companies like AIG.
Ecommerce (Dot-Com Company)
The business model that allows a firm or individual to conduct business electronically (typically over the internet); operates business to business, business to consumer, consumer to consumer, and consumer to business (a corporation that procl…
Tech Bubble
A pronounced and unsustainable market rise attributed to increased speculation in technology stocks.
Venture Capitalist
An investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to public funding (generally generate large returns on their risky investments)
Interest Rate
Cost of borrowing funds
Federal Reserve (District Feds)
Banks that carry out Fed operations, including controlling the money supply and regulating member banks. There are 12 District Feds, headquartered in Boston, New York, Philadelphia, Cleveland, St. Louis, San Francisco, Richmond, Atlanta, Chicago, Minneapolis, Kansas City and Dallas.
Speculation
The act of trading in an asset, or conducting a financial transaction that involves considerable risk of losing up to all of the initial outlay, but offering the chance of substantial gains.
Initial Public Offering (IPO)
A corporation's first offer to sell stock to the public. The price is determined by factors such as the strength of the company's financial statements, how profitable it is, public trends, growth rates and even investor confidence.
Secondary Offering
The sale of a large block of outstanding stock in the second round after the IPO.
Floating Stock
Shares of a company that are freely available for purchase by investors on the secondary market. The more shares of floating stock are available, the less volatile a company's stock price is likely to…
Day Trader
A person who of buys and sells shares on the same day, often on the Internet, in order to make a quick profit (not practical for long-term investment)