Second Short Quiz

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johnkarls
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Joined: Fri Jun 29, 2007 8:43 pm

Second Short Quiz

Post by johnkarls »

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Introductory Note =

The First Short Quiz focused, inter alia, on the fact that, in general, commercial banks do NOT make loans to American business and they do NOT make mortgage loans to American homeowners (as distinguished from originating mortgage loans which they immediately sell to Fannie Mae, Freddie Mac and/or the U.S. Federal Reserve and then collect fees for servicing those loans).

The final Q&A of the First Short Quiz alluded to the fact that commercial banks have concentrated for many decades on making credit-card loans to American taxpayers at exorbitant interest rates.

[In this regard, it should be noted that commercial banks do not even make many auto loans because the auto companies have long since established their own finance subs as a way of competing with each other.]

However, commercial banks as a class have also invested a substantial portion of their FDIC-insured deposits in high-risk high-return assets.

Most recently, this took the form of investing in high-risk high-return sub-prime mortgage pools which were created by investment banks such as Goldman Sachs and marketed to commercial banks as well as institutional investors such as pension funds and university-endowment funds. [And whose value was insured by AIG which disingenuously called the insurance policies Credit-Default Swaps in a successful attempt to fool the N.Y. State Insurance Regulators into believing the CDS’s were not merely plain-old garden-variety insurance contracts -- NB: AIG’s tom-foolery didn’t fool Goldman Sachs which required the AIG parent company to guarantee those insurance contracts since they were being written by relatively-infinitesimal AIG Financial Products Inc. which was NOT maintaining any insurance reserves to cover losses (the guarantees by the AIG parent company meant that the insurance reserves on the CDS insurance contracts took the form of the value of AIG’s three huge and hugely-profitable main subsidiaries, which is why the entire AIG group had to be bailed out by the U.S. Government, rather than simply letting AIG Financial Products Inc. go through bankruptcy)].

In order to disabuse the reader of these quizzes of the notion that sub-prime mortgages were only a one-time temptation to the commercial banks which have now learned their lesson, the following questions examine the high-return high-risk investments comprising a substantial portion of the assets of the commercial banks during the two decades before sub-prime mortgages came along!!!

[In other words, there will always be a new Serpent in the Garden of Eden, so an appreciation that the Sub-Prime-Mortgage Serpent was NOT the first Serpent is worthwhile to gain an appreciation that there will always be more Serpents of an infinite variety that will come along!!!]

1. What made Rudy Giuliani famous?

2. Who was Michael Milken?

3. What were Junk Bonds?

4. How did Junk Bonds fuel the Limited Buy-Outs (LBO’s) of the 1980’s and 1990’s?

5. What is Mezzanine Debt?

6. Who invested in the Mezzanine Debt?

7. Why were LBO’s, by and large, so profitable?

8. What were some of the unfortunate side effects of LBO’s?

9. When Mitt Romney tried to defend his record at Bain Capital, what types of companies did he cite?

10. What is the difference between LBO’s and venture capital?

11. Were the commercial banks really undertaking substantial risk in buying the Mezzanine Debt (aka Junk Bonds) of the LBO’s?

12. Was it the Mezzanine Debt (aka Junk Bonds) that made the Levereaged Buy Outs leveraged?

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