Question 1
A bank has assets valued at $1,000,000. These assets are funded with $80,000 of equity. The leverage ratio for this institution is:
12.5
10.5
125/1
105/1
20
20.5
Question 2
The maximum debt equity ratio for fund HEDGE is 30. Currently the debt equity ratio is 40. The fund has recievd a margin call. The managers must deposit at least $x of addtional collateral to meet the margin call. Assets = $100.
$0.25
$0.34
$0.26
$0.30
Question 3
If a hedge fund finances positions in MBS using the REPO market and the fund cannot roll over its maturing debt or meet the margin call by posting more collateral the lender will begin to sell the collateral.
True
False
Question 4
A margin call requires the borrower to increase its equity to support its debt.
True
False
Question 5
Repo lenders require collateral as security. Often this security was MBS. When the MBS began to lose value in 2008 as ratings were lowered; lenders required borrowers to post additional collateral. As lenders sold assets to raise cash collateral values fell further requiring additional sales. This downward spiral in debt prices is indicative of a worsening financial crisis. True
False
Question 6
According to the 10-Q filed by WMI Holdings Corp on 8/11/2008 the access the bank had to some sources of liquidity were dependent on third party credit ratings of the company's debt obligations.
True
False
Question 7
In April of 2007, JP Morgan told Alan Schwartz, Bear Stearns's co-president, that the bank would be asking the BSAM hedge funds to post additional collateral to support its repo borrowing.
True
False
Question 8
According to the FCIC Market Risk Survey;
Lehman was borrowing less than $400 million via the REPO market on 9/12/2008 from money market funds.
True
False
Question 9
In early June, Bear met with BSAM's repo lenders to explain that BSAM lacked cash to meet margin calls and to negotiate a 60-day reprieve. Some of these very same firms had sold Enhanced and High-Grade some of the same CDOs and other securities that were turning out to be such bad assets. The banks agreed to give Bear Stearns time to slowly liquidate assets.
True
False
Question 10
This statement from the 10-K filed by Bear Stearns for the Fiscal year 2007 indicates that management was aware that the firm
was exposed to a run by other banks. "An inability to raise money in the long-term or short-term debt markets,
or to engage in repurchase agreements or securities lending, could have a substantial negative effect on our liquidity."
True
False
Question 11
Hedge Funds were able to use AAA and AA rated tranches of CDOs as collateral for Repo borrowing in the years leading up to the collapse of the hedge funds managed by Ralph Cioffi of BSAM.
True
False
Question 12
Ralph Cioffi managed two subprime hedge funds for Bear Stearns that had debt equity ratios in excess of 60.
True
False
Question 13
The required debt to equity ratio is 9. Debt outstanding is $90. Asset value is $100. If asset value falls to $91 what amount of assets must be sold to repay debt so that the debt equity ratio is restored to 9?
$90
$81
$18
$91
Question 14
Shortly after BSAM froze redemptions, Merrill Lynch seized more than $850 million of its collateral posted by Bear for its outstanding repo loans. Merrill was able to sell just $181 million of the seized collateral at auction by July 5-and at discounts to its face value.
True
False
Question 15
In After the Music Stopped we learn that household debt grew from approximately 100% of GDP in the year 2000 to about 140% by 2008.
True
False
Question 16
Due to margin calls in the year 2007 BSAM had to issue more debt to raise the funds to come up with the cash. This issue of debt increased the leverage of the funds and depressed the value of the assets under management.
True
False
Question 17
According to the FCIC report as of 12/31/2013 the asset base of the "shadow banking" system was larger that of the "traditional banking system".
True
False
Question 18
According to the 2011 FCIC Hedge Fund Survey;
The top quartile of hedge funds became more bullish regarding the subprime market between June of 2006 and June of 2007.
True
False
Question 19
As MBS values declined in 2008 lenders made margin calls on funds that had financed subprime assets. Margin calls prompted borrowers to liquidate the leveraged assets to bring leverage ratios back into line. Since the market for subprime MBS was illiquid these sales further depressed the prices of subprime MBS and this caused more margin calls to be made as leverage ratios declined.
True
False
Question 20
During a June Federal Open Market Committee (FOMC) meeting, members were informed about the subprime market and the BSAM hedge funds. The staff reported that the subprime market was "very unsettled and reflected deteriorating fundamentals in the housing market." The liquidation of subprime securities at the two BSAM hedge funds was compared to the troubles faced by Long-Term Capital Management in 1998. Chairman Bernanke noted that the problems the hedge funds experienced were a good example of how leverage can increase liquidity risk, especially in situations in which counterparties were not willing to give them time to liquidate and possibly realize whatever value might be in the positions.
The liquidity risk is that an owner of assets in this case hedge funds cannot realize the value of assets immediately or that there is no agreement on the value of the assets by buyers and sellers.
True
False
Question 21
1) A hedge fund has a leverage ratio of 20. If the value of the assets on its balance sheet increases by 15% by what percent does the value of its equity increase?
350%
3.5%
30%
3%
300%
Question 22
The margin calls on BSAM funds did not have effects beyond these funds. There was no contagion effect of the margin calls. This was because BSAM was able to liquidate assets at bid prices close to the value at which the assets were carried.
True
False
Question 23
As MBS values declined in 2008 lenders made margin calls on funds that had financed subprime assets. Margin calls prompted borrowers to liquidate the leveraged assets to bring leverage ratios back into line. Since the market for subprime MBS was liquid these sales did not affect prices of subprime MBS.
True
False
Question 24
The decline in home values since 2007 led to serious financial distress in the household sector and the banking sector because:
The decline led to a decrease in the debt/equity ratio of both households and banks.
The decline increased the value of mortgage-backed securities and corporate bonds.
The decline lowered the demand for housing.
The decline led to an increase in the debt/equity ratio of both households and banks.
Question 25
According to the FCIC Market Risk Survey;
Lehman was borrowing more than $900 million via the REPO market on 9/5/2008 from money market funds.
True
False