1. Question 17.10

   Which of the following are not examples of a vicious cycle of deleveraging? Explain.

   1. Your university decides to sell several commercial buildings in the middle of town in order to upgrade buildings on campus.

   2. A company decides to sell its large and valuable art collection because other asset prices on its balance sheet have fallen below a critical level, forcing creditors to call in their loans to the company because of provisions written into the original loan contract.

   3. A company decides to issue more stock in order to voluntarily pay off some of its debt.

   4. A shadow bank must sell its holdings of corporate bonds because falling asset prices have led to a default on the terms of its loans with some creditors.

2. Question 17.11

   In the following figure showing the Case–Shiller U.S. Home Price Index from 2000 to 2010, did housing prices peak before or after the financial crisis in the United States? Explain your answer.

   

   Source: Robert J. Shiller, Irrational Exuberance, 2nd ed. (Princeton, NJ: Princeton University Press 2005); data retrieved from http://www.econ.yale.edu/~shiller/data.htm.

3. Question 17.12

   Figure 17-2 tracks the unemployment rate in the years before and after the Panic of 1893 in the United States, the banking crisis of 1991 in Sweden, and the American financial crisis of 2008.

   1. In Figure 17-2, how many years after the Panic of 1893 did unemployment peak in the United States?

   2. In Figure 17-2, how many years after the banking crisis of 1991 did unemployment peak in Sweden?

   3. In Figure 17-2, how many years after the banking crisis of 2008 did unemployment peak in the United States?

4. Question 17.13

   In 2007–2009, the Federal Reserve, acting as a lender of last resort, stepped in to provide funds when private markets were unable to do so. The Fed also took over many banks. In 2007, it seized 3 banks; in 2008, it seized 25 banks; and in 2009, it seized 140 banks. Go to www.fdic.gov; under “Bank Closing Information,” click on “Complete Failed Bank List.” Then count the number of banks that the Federal Reserve has seized so far this year. Have bank failures decreased since the crisis in 2009?

5. Question 17.14

   During the financial crisis in October 2008, the federal government could borrow at a rate of 2.73% (the yield on five-year Treasury securities). During October 2008, though, Baa borrowers (corporate borrowers rated by Moody’s as not being completely reliable) had to pay 8.88%.

   1. What was the difference in borrowing costs for these corporate borrowers and the federal government?

   2. Go to www.research.stlouisfed.org/fred2/categories/22. Click on the link for “Treasury Constant Maturity” and find the most recent interest rate on 10-year U.S. Treasury bonds. Then click back to the original web page on the link for “Corporate Bonds,” then “Moody’s,” and find the rate for Baa corporate bonds. What is the current difference in borrowing costs between corporate borrowers and the U.S. government?

   3. Has this difference in borrowing costs increased or decreased since the height of the financial crisis in October of 2008? Why?

6. Question 17.15

   Go to www.federalreserve.gov and click on the tab “Banking Information & Regulation.” Then select the links “Banking Data” followed by “Large Commercial Banks.” Once there, choose the latest release of quarterly data.

   1. Which bank has the largest consolidated assets?

   2. Which bank has the largest domestic assets?

   3. What percent of U.S. GDP are the domestic assets of the bank listed in part b? (Hint: You can find U.S. GDP at http://research.stlouisfed.org/fred2/series/GDP?cid=106 using the links “Gross Domestic Product (GDP)” and then “Current-dollar and ‘real’ GDP.”)

7. Question 17.16

   Go to www.fdic.gov and click on the tab “Industry Analysis” and then on the link “Research & Analysis.” Select “The First Fifty Years: A History of the FDIC 1933–1983.” Open Chapter 3, “Establishment of the FDIC,” and scroll down to the section entitled “The Banking Crisis of 1933” and the section entitled “Federal Deposit Insurance Legislation.” Read the section and then answer these questions.

   1. President Roosevelt was sworn in on March 4, 1933. What was one of his first official acts in response to the banking crisis?

   2. How many banks suspended operations during 1933?

   3. Who was the chief proponent of federal deposit insurance in Congress?

   4. How much coverage did the temporary fund for federal deposit insurance provide?

8. Question 17.17

   The U.S. Government Accountability Office (GAO) does research to support congressional decision making. After the Long-Term Capital Management (LTCM) crisis, the GAO produced a summary of the events of the crisis located at www.gao.gov/products/GGD-00-3. Read the summary and then answer the following questions.

   1. How much of its capital did LTCM lose in 1998?

   2. Why did the GAO conclude that LTCM was able to establish leveraged trading positions of a size that posed systemic risk to the banking system?

   3. What was the recommendation of the President’s Working Group regarding the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC)?

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