Test 2 Extra Credit – 7 points
The financial crisis of 2008 has left our economy in a volatile and unpredictable recession. This assignment will focus on
some of the practices and events that led to the housing bubble and ultimately its collapse – which, in turn, raises
questions about the solvency of our banking system, the securization process for loan agreements, foreclosure practices,
and the recent bank bailouts. For example, what is a Collaterized Debt Obligation, what is a Credit Default Swap, what is
the Glass-Steagall Act, what do the Investment Banks, Insurance Companies, Regulatory Agencies, Ratings Agencies,
Accounting Firms, Law Firms, Congress and the Federal Reserve have to do with the failure of our system?
I’ve posted the following three articles and a video link for this assignment.
Article 1:
Derivatives: The Unregulated Global Casino for Banks, 2012 - This website defines derivatives,
provides an up-to-date visual of our biggest banks’ derivative exposure, and lists other interesting facts about
some of those banks.
http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html
Article 2:
In The Big Takeover, March 2009 - Taibbi outlines some of the events that led to an economic collapse in
2008. He writes about how we got to the breaking point, the underlying problems leading to the crisis, and his
frank conclusions. He uses AIG as his example, but keep in mind, the same actions and consequences were
occurring in many of the world’s largest financial institutions simultaneously.
Disclaimer: Taibbi uses a lot of slang in his writing. His choice of words and his passion will keep you
interested in what he has to say, but I do not recommend that we emulate his writing style.
Video:
Bill Moyers’ Journal – Interview with William Black, April 2010 – Professor William Black currently
teaches economics and law at the University of Missouri Kansas City. He has also taught at UT Austin and
Santa Clara University. Professor Black was a leading government official and litigation specialist responsible
for cleaning up the financial mess from the 1980s S&L crisis.
http://www.pbs.org/moyers/journal/04232010/watch.html
Answer the following questions for each article and video. Some questions may require just a short answer, and some
questions may require further explanation. All the answers may be found in the body of the article and video in
relative order.

Print the following outline of questions and provide hand-written
write legibly so that I can read it.

Answer ALL the questions completely for full credit. Some questions will only require a number or phrase as
an answer, and some will require complete sentences in answer to the question.
solutions to the questions. Be sure to
Name:____________________________________
Derivatives: The Unregulated Global Casino for Banks
1) What is a derivative?
2) Is the derivative trading system regulated?
3) The 9 largest banks reported on the site hold how much exposure in derivative investment assets?
What is that amount relative to the entire world economy?
4) $100 million = 1 year of work for how many average Americans?
5) What is the derivative exposure for each of the following banks?
Morgan Stanley –
Wells Fargo –
HSBC –
Goldman Sachs –
Bank of America –
Citibank –
JP Morgan Chase –
6) Name at least 3 specific crimes, legal and/or ethical violations, or offenses committed by these “Too Big To Fail”
investment banks in the last few years noted by this author.
1)
2)
3)
The Big Takeover
by Matt Taibbi
Rolling Stone magazine
Date of Article: March 9, 2009
1.
The latest TARP bailout went to AIG from the Federal Government after AIG posted the largest quarterly loss in
American Corporate History. What was the amount of that quarterly loss?
2.
Who is Joseph Cassano, and what department of AIG did Mr. Cassano oversee?
3.
What is a Collateralized Debt Obligation – CDO; and how does it function as a financial instrument?
4.
How were investment banks able to sell pools of high-risk, bad loans [CDOs] to conservative, risk-averse investors
like city and state governments, pension or insurance companies?
5.
What is a Credit Default Swap – CDS; and how does it function as a financial instrument?
6.
What are two (2) major differences between Credit Default Swaps and a traditional insurance policy?
1)
2)
7.
Over the last 7 years [from 2009], what is the total value of Credit Default Swaps that AIG sold on the market? Did
they have any reserves on hand to back up these unregulated “insurance” instruments?
8.
Over the last 7 years [from 2009], how much were the 400 employees of Cassano’s department at AIG paid in
compensation?
9.
What was the Glass-Steagall Act? When was it passed? What did it do?
10. In 10-year period from 1998 to 2008, how much had the Financial Services Industry contributed to Politicians and
Lobbyists in Washington DC [of both parties]?
11. What happened to the Glass-Steagall Act in 1999?
12. What was the Commodity Futures Modernization Act? What did it do?
13.
What governmental office was in charge of regulating AIG?
14. How many Insurance specialists are on the staff of the Office of Thrift Supervision?
15. By the fall of 2007, it had become obvious that AIG’s financial portfolio was seriously endangering the company’s
stability. Who was the accountant that publicly stated that he was “gravely concerned” about the Credit Default
Swaps and the activities of Cassano’s department? What happened to him?
16. In February 2008, AIG’s audit noted “material weaknesses” on the annual report after posting an $11.5 billion annual
loss. What happened to Joseph Cassano in February of 2008 once the financial condition of AIG became publicly
known? Was he fired and left for the poor house?
17. What ultimately sank AIG?
18. In September of 2008, AIG’s senior leaders were “summoned to the offices of the NY Federal Reserve”. Who was
present at that meeting with the AIG senior officers?
19. What was the ultimate decision to come out of the meeting?
20. “A short time after the meeting” at the NY Federal Reserve, AIG accelerated a payout of how much in bonuses?
21. In January of 2009, AIG “did it again”. AIG paid more bonuses to key employees. How much in bonuses did they
pay out at this time, and to whom?
22. From 2004 to 2008, what happened to the Debt to Equity ratio of most big banks - for example, Bear Stearns?
23. In 2007, what significant investments did Goldman Sachs add to its portfolio? What amount of risk exposure did they
have in Credit Default Swap derivatives – and with whom? Could this explain why Goldman Sachs was in the
meeting with AIG and the Treasury in September?
24. From the summer of 2007 to 2009, the Federal Reserve injected money into the economy at alarming rates. How
much cash did the Federal Reserve inject into the economy in just the week of May 1, 2008?
25. By early 2009, the Federal Reserve stopped using transparent devices like repurchase agreements to pump money
into the hands of private companies. They, instead, started using a series of new government operations to get cash
to private companies. Name just two (2) of those programs.
1)
2)
26. The TARP bailout program approved by Congress was for $700 billion. How much cash have the new Federal
Reserve programs been quietly pumping into the hands of private companies – billions or trillions?
27. According to the Accounting and Auditing Act of 1950 – who audits (or may audit) the Federal Reserve central bank?
Bill Moyers Journal
Interview with William Black
Date of Interview: April 23, 2010
I’ve attached a link to video of Bill Moyers’ interview with William Black. The video is about 30 minutes in length, so
downloading and viewing the video will likely require high-speed internet access. As you watch the video, answer the
following questions in the order presented.
Background:
William K. Black
William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches
economics and law at the University of Missouri — Kansas City (UMKC). He was the executive
director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ
School of Public Affairs at the University of Texas at Austin and at Santa Clara University,
where he was also the distinguished scholar in residence for insurance law and a visiting scholar
at the Markkula Center for Applied Ethics.
Black was litigation director of the Federal Home Loan Bank Board, deputy director of the Federal Savings and
Loan Insurance Corporation (FSLIC), senior vice president and general counsel of the Federal Home Loan Bank
of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the
National Commission on Financial Institution Reform, Recovery and Enforcement.
Black developed the concept of "control fraud" — frauds in which the CEO or head of state uses the entity as a "weapon."
Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World
Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's
former senior management.
1) How does William Black define fraud?
2) According to Black, who should have been regulating the investment banks in the run-up to this financial crisis?
3) According to Black, what was the primary reason Lehman Brothers went down?
4) What is a “liar’s loan”?
5) Studies show that the frauds in Liar’s Loans are overwhelmingly committed by who – the loan broker or the
borrower?
6) Who was Mathew Lee? What happened to him? Why? Explain.
7) What public accounting firm was responsible for the audit of Lehman’s financial statements?
8) Did Lehman’s auditors have reason to believe that Lehman’s financial statements had material
misrepresentations? Why?
9) What is the role of an Auditor?
10) Why would a public accounting firm assigned to audit a company’s financial statements not require disclosure of
known misrepresentations (fraud)?
11) What is a criminogenic environment? What are two (2) key elements of a criminogenic environment according to
William Black?
12) What is Gresham’s Dynamic?
13) What does a Gresham’s Dynamic scenario do to the market?
14) Secretary Geithner testified to Congress that the federal government had no authority over or could have done
nothing to prevent the problems we currently have in the financial system. How does William Black refute that
claim?
15) Secretary Geithner testified to Congress that given the circumstances we were faced with at Lehman, “we were
on the brink of the destruction of the entire global financial system”. Chairman Bernanke told Congress the
number of federal agents sent to the Lehman headquarters to deal with the disaster. How many federal agents
were sent to Lehman to deal with the disaster?
16) Who was John Paulson [note this is not the same person as former Treasury Secretary Hank Paulson]? What did
he do for Goldman Sachs?
17) The SEC (federal government) filed charges against Goldman Sachs. What were the charges against Goldman
Sachs in this lawsuit? [Update, Goldman Sachs has since settled the lawsuit and paid a relatively low fine.]
18) According to William Black (Professor of Economics and Law), what is the neoclassical economists’ view of
fraud? Explain why.
19) In a “joking” manner, what does Black say offers the highest return on assets?