Question 1

Mark-to-market accounting is incorrectly characterized as:

Accepted Answer

A) Relevant for management compensation purposes 
B) Relevant for valuation purposes 
C) Relevant to investors 
D) Sometimes misleading 
E) Responsible for the subprime lending fiasco 
A) Relevant for management compensation purposes 
B) Relevant for valuation purposes 
C) Relevant to investors 
D) Sometimes misleading 
E) Responsible for the subprime lending fiasco E

Question 2

Early in 2008, mark-to-market accounting provisions caused the banks to:

Accepted Answer

A) Revalue their portfolio downwards 
B) Be in jeopardy of falling below the regulatory capital requirements 
C) Restrict new loans 
D) All of the above 
E) (a)and (c)only 
A) Revalue their portfolio downwards 
B) Be in jeopardy of falling below the regulatory capital requirements 
C) Restrict new loans 
D) All of the above 
E) (a)and (c)only D

Question 3

The 1999 Gramm-Leach-Bliley Act allowed banks to:

Accepted Answer

A) Engage in subprime lending 
B) Sell insurance 
C) Become more involved in investment bank activities 
D) Underwrite government bonds 
E) Choose between commercial and investment bank activities 
A) Engage in subprime lending 
B) Sell insurance 
C) Become more involved in investment bank activities 
D) Underwrite government bonds 
E) Choose between commercial and investment bank activities C

Question 4

These entities worked as second party consolidators, purchasing loans and reselling them to investors:

Accepted Answer

A) Federal National Mortgage Association (Fannie Mae)and Federal Home Loan Mortgage Corporation (Freddie Mac) 
B) Structured Investment Vehicles (SIVs) 
C) Credit rating agencies 
D) Investment banks 
E) All of the above 
A) Federal National Mortgage Association (Fannie Mae)and Federal Home Loan Mortgage Corporation (Freddie Mac) 
B) Structured Investment Vehicles (SIVs) 
C) Credit rating agencies 
D) Investment banks 
E) All of the above

Question 5

Which of the following is NOT an example of aggressive lending practices contributing to the subprime crisis?

Accepted Answer

A) Mortgagors were not required to make any down-payment at the inception of the loan 
B) Loans were given to people with poor credit histories 
C) Loans were given to people with no income 
D) A borrower could get a second mortgage and use it as down-payment 
E) None of the above 
A) Mortgagors were not required to make any down-payment at the inception of the loan 
B) Loans were given to people with poor credit histories 
C) Loans were given to people with no income 
D) A borrower could get a second mortgage and use it as down-payment 
E) None of the above

Question 6

Mortgage-backed securities lost their value when:

Accepted Answer

A) The underlying assets lost their value 
B) Borrowers (the mortgagees)walked away without real obligation to repay 
C) Mortgage originators went bankrupt 
D) (a)and (b) 
E) (b)and (c) 
A) The underlying assets lost their value 
B) Borrowers (the mortgagees)walked away without real obligation to repay 
C) Mortgage originators went bankrupt 
D) (a)and (b) 
E) (b)and (c)

Question 7

Some observers claim that the U.S.Federal Reserve Board encouraged the housing and credit bubbles by:

Accepted Answer

A) Not regulating subprime mortgages 
B) Cutting interest rates 
C) Enforcing mark to market accounting 
D) (a)and (b) 
E) (a)and (c) 
A) Not regulating subprime mortgages 
B) Cutting interest rates 
C) Enforcing mark to market accounting 
D) (a)and (b) 
E) (a)and (c)

Question 8

A fundamental problem with Goldman Sachs' GSAMP Trust was that:

Accepted Answer

A) Loans were given to people with poor credit histories 
B) Homeowners' equity in the securitized mortgages was less than 1 percent on average 
C) Loans were given to people with no income 
D) 58 percent of the securitized loans had little or no documentation 
E) All of the above 
A) Loans were given to people with poor credit histories 
B) Homeowners' equity in the securitized mortgages was less than 1 percent on average 
C) Loans were given to people with no income 
D) 58 percent of the securitized loans had little or no documentation 
E) All of the above

Question 9

Investors relied on the judgment of credit rating agencies because:

Accepted Answer

A) Credit rating agencies are supposed to be the experts in evaluating credit risk 
B) Information directly available to investors on mortgage pools was insufficient 
C) Credit rating agencies are supposed to perform a thorough due diligence before rating a given security 
D) All of the above 
E) (a)and (c) 
A) Credit rating agencies are supposed to be the experts in evaluating credit risk 
B) Information directly available to investors on mortgage pools was insufficient 
C) Credit rating agencies are supposed to perform a thorough due diligence before rating a given security 
D) All of the above 
E) (a)and (c)

Question 10

Late in 2008, the International Accounting Standards Board allowed firms to:

Accepted Answer

A) Reclassify devaluated financial assets delaying recognition of losses 
B) Estimate the value of the portfolio if there is no ready market for a derivative portfolio 
C) Reduce their capital requirements 
D) Accelerate the recognition of losses through mark-to-market accounting 
E) None of the above 
A) Reclassify devaluated financial assets delaying recognition of losses 
B) Estimate the value of the portfolio if there is no ready market for a derivative portfolio 
C) Reduce their capital requirements 
D) Accelerate the recognition of losses through mark-to-market accounting 
E) None of the above

Question 11

Mark-to-market accounting is usually related to all of the following items, except:

Accepted Answer

A) Derivatives and financial instruments 
B) Firm's long term cash flows 
C) Firm's short term taxes payable 
D) Firm's short term cash flows 
E) Immediate recognition of unrealized gains and losses 
A) Derivatives and financial instruments 
B) Firm's long term cash flows 
C) Firm's short term taxes payable 
D) Firm's short term cash flows 
E) Immediate recognition of unrealized gains and losses

Question 12

Goldman Sachs' GSAMP Trust was able to create AAA rated securities by:

Accepted Answer

A) Separating the mortgage portfolio into tranches and assigning the tranches to share risks of default equally. 
B) Not disclosing the risks clearly 
C) Guaranteeing or protecting some tranches 
D) Separating the mortgage portfolio into tranches and designating the A-1, A-2, and A-3 tranches last in order, after the M-1 to M-7 and B-1 to B-3 tranches, to suffer losses if a default occurred 
E) All of the above 
A) Separating the mortgage portfolio into tranches and assigning the tranches to share risks of default equally. 
B) Not disclosing the risks clearly 
C) Guaranteeing or protecting some tranches 
D) Separating the mortgage portfolio into tranches and designating the A-1, A-2, and A-3 tranches last in order, after the M-1 to M-7 and B-1 to B-3 tranches, to suffer losses if a default occurred 
E) All of the above

Question 13

According to former Federal Reserve Chairman Alan Greenspan, the Fed became concerned about subprime lending in 2000, however:

Accepted Answer

A) the global demand for mortgage-backed security ended in 2005 
B) the quality of mortgage products began to deteriorate in 2005 
C) the global demand for mortgage-backed security started in 2003 
D) the quality of mortgage products began to deteriorate in 2003 
E) the global demand for mortgage-backed security ended in 2008 
A) the global demand for mortgage-backed security ended in 2005 
B) the quality of mortgage products began to deteriorate in 2005 
C) the global demand for mortgage-backed security started in 2003 
D) the quality of mortgage products began to deteriorate in 2003 
E) the global demand for mortgage-backed security ended in 2008

Question 14

In simple terms, a mortgage-backed security is:

Accepted Answer

A) A portfolio of mortgages sold to investors through publicly issued bonds 
B) A contract that transfers ownership of a lender's mortgages receivable 
C) A contract that transfers the risk of non-collection from mortgage originators to other investors 
D) All of the above 
E) (a)and (c)only 
A) A portfolio of mortgages sold to investors through publicly issued bonds 
B) A contract that transfers ownership of a lender's mortgages receivable 
C) A contract that transfers the risk of non-collection from mortgage originators to other investors 
D) All of the above 
E) (a)and (c)only

Question 15

The 1933 Glass-Steagall Act precluded banks from:

Accepted Answer

A) Subprime lending 
B) Selling insurance 
C) Underwriting insurance generating more than 10% of total banking income 
D) Underwriting securities generating more than 10% of total banking income 
E) Underwriting any securities 
A) Subprime lending 
B) Selling insurance 
C) Underwriting insurance generating more than 10% of total banking income 
D) Underwriting securities generating more than 10% of total banking income 
E) Underwriting any securities

Question 16

A fundamental problem with Goldman Sachs' GSAMP Trust, impeding Goldman's ability to foreclose on defaulted mortgages was that:

Accepted Answer

A) Homeowners' equity in the securitized mortgages was less than 1 percent 
B) 40 percent of the securitized loans had little or no documentation 
C) Investors relied on Goldman Sachs 
D) The underlying assets were second mortgages 
E) The mortgages were allocated into thirteen tranches with different risk characteristics 
A) Homeowners' equity in the securitized mortgages was less than 1 percent 
B) 40 percent of the securitized loans had little or no documentation 
C) Investors relied on Goldman Sachs 
D) The underlying assets were second mortgages 
E) The mortgages were allocated into thirteen tranches with different risk characteristics

Question 17

In simple terms, the securitization process is:

Accepted Answer

A) A way to sell Structured Investment Vehicles (SIVs) 
B) A way to sell accounts receivable by mortgage lenders to public investors 
C) A way to create high-yield investments with little risk 
D) All of the above 
E) (a)and (c)only 
A) A way to sell Structured Investment Vehicles (SIVs) 
B) A way to sell accounts receivable by mortgage lenders to public investors 
C) A way to create high-yield investments with little risk 
D) All of the above 
E) (a)and (c)only

Question 18

These regulators were aware of the problem and tried to blow the whistle in 2003:

Accepted Answer

A) Security and Exchange Commission and Federal Reserve Board 
B) Iowa and North Carolina State Attorneys 
C) Office of the Comptroller of the currency and Office of Thrift Supervision 
D) Federal banking regulators 
E) None of the above 
A) Security and Exchange Commission and Federal Reserve Board 
B) Iowa and North Carolina State Attorneys 
C) Office of the Comptroller of the currency and Office of Thrift Supervision 
D) Federal banking regulators 
E) None of the above

Question 19

An issue with mark-to-market accounting when there is a highly depressed market is that:

Accepted Answer

A) Depressed values could be only temporary, portfolios are likely to re-gain value, and thus current unrealized losses are overstated 
B) Depressed values could be not only temporary, portfolios are likely to re-gain value, and thus current losses are overstated 
C) Depressed values could be only temporary, portfolios are not likely to re-gain value, and thus current losses are understated 
D) Depressed values could be only temporary, portfolios are not likely to re-gain value, and thus current non-realized gains are overstated 
E) Depressed values could be only temporary, portfolios are likely to re-gain value, and thus current non-realized losses are understated 
A) Depressed values could be only temporary, portfolios are likely to re-gain value, and thus current unrealized losses are overstated 
B) Depressed values could be not only temporary, portfolios are likely to re-gain value, and thus current losses are overstated 
C) Depressed values could be only temporary, portfolios are not likely to re-gain value, and thus current losses are understated 
D) Depressed values could be only temporary, portfolios are not likely to re-gain value, and thus current non-realized gains are overstated 
E) Depressed values could be only temporary, portfolios are likely to re-gain value, and thus current non-realized losses are understated

Question 20

Rating agencies were exposed to a conflict of interest because:

Accepted Answer

A) Credit rating agencies were rating securities and investing in those securities 
B) Credit rating agencies used ratings to sell securities 
C) Clients of the credit rating agencies used ratings to sell securities 
D) Investors do not want rating downgrades 
E) Credit rating agencies were paid by the firms who created the securities being rated 
A) Credit rating agencies were rating securities and investing in those securities 
B) Credit rating agencies used ratings to sell securities 
C) Clients of the credit rating agencies used ratings to sell securities 
D) Investors do not want rating downgrades 
E) Credit rating agencies were paid by the firms who created the securities being rated

Mark-to-market accounting is incorrectly characterized as:

Early in 2008, mark-to-market accounting provisions caused the banks to:

The 1999 Gramm-Leach-Bliley Act allowed banks to:

These entities worked as second party consolidators, purchasing loans and reselling them to investors:

Which of the following is NOT an example of aggressive lending practices contributing to the subprime crisis?

Mortgage-backed securities lost their value when:

Some observers claim that the U.S.Federal Reserve Board encouraged the housing and credit bubbles by:

A fundamental problem with Goldman Sachs' GSAMP Trust was that:

Investors relied on the judgment of credit rating agencies because:

Late in 2008, the International Accounting Standards Board allowed firms to:

Mark-to-market accounting is usually related to all of the following items, except:

Goldman Sachs' GSAMP Trust was able to create AAA rated securities by:

According to former Federal Reserve Chairman Alan Greenspan, the Fed became concerned about subprime lending in 2000, however:

In simple terms, a mortgage-backed security is:

The 1933 Glass-Steagall Act precluded banks from:

A fundamental problem with Goldman Sachs' GSAMP Trust, impeding Goldman's ability to foreclose on defaulted mortgages was that:

In simple terms, the securitization process is:

These regulators were aware of the problem and tried to blow the whistle in 2003:

An issue with mark-to-market accounting when there is a highly depressed market is that:

Rating agencies were exposed to a conflict of interest because:

Ethics Expectations

Ethics & Governance Scandals

Ethical Behavior Philosophers’ Contributions

Practical Ethical Decision Making

Corporate Ethical Governance & Accountability

Professional Accounting in the Public Interest, Post Enron

Managing Ethics Risks & Opportunities

The Credibility Crisis - Enron, WorldCom & SOX

Filters

Exam 8: Subprime Lending Fiasco – Ethics Issues

Mark-to-market accounting is incorrectly characterized as:

Early in 2008, mark-to-market accounting provisions caused the banks to:

The 1999 Gramm-Leach-Bliley Act allowed banks to:

These entities worked as second party consolidators, purchasing loans and reselling them to investors:

Which of the following is NOT an example of aggressive lending practices contributing to the subprime crisis?

Mortgage-backed securities lost their value when:

Some observers claim that the U.S.Federal Reserve Board encouraged the housing and credit bubbles by:

A fundamental problem with Goldman Sachs' GSAMP Trust was that:

Investors relied on the judgment of credit rating agencies because:

Late in 2008, the International Accounting Standards Board allowed firms to:

Mark-to-market accounting is usually related to all of the following items, except:

Goldman Sachs' GSAMP Trust was able to create AAA rated securities by:

According to former Federal Reserve Chairman Alan Greenspan, the Fed became concerned about subprime lending in 2000, however:

In simple terms, a mortgage-backed security is:

The 1933 Glass-Steagall Act precluded banks from:

A fundamental problem with Goldman Sachs' GSAMP Trust, impeding Goldman's ability to foreclose on defaulted mortgages was that:

In simple terms, the securitization process is:

These regulators were aware of the problem and tried to blow the whistle in 2003:

An issue with mark-to-market accounting when there is a highly depressed market is that:

Rating agencies were exposed to a conflict of interest because:

Ethics Expectations

Ethics & Governance Scandals

Ethical Behavior Philosophers’ Contributions

Practical Ethical Decision Making

Corporate Ethical Governance & Accountability

Professional Accounting in the Public Interest, Post Enron

Managing Ethics Risks & Opportunities

The Credibility Crisis - Enron, WorldCom & SOX

Filters