Question

Address ONE of the following topics:

Where were the regulators? In response to this question: 1) identify a bank regulator 2) explain one reason given the text concerning why bank regulators failed to reign in practices in subprime lending and the securitizing and leveraging of bad mortgages. Do not reproduce information already in the thread.

Identify and define a derivative that played a role in the crisis, mortgage backed securities, credit default swaps, then explain why the abuse of these derivatives caused problems.

What is leverage? Describe one example of how excessive leverage created enormous risks for Wall Street firms. This topic may end up being related to the second topic if one discusses leverage and the use of derivatives. Try to move the dialogue to a discussion of how abuse of leverage created system wide risks.

Answer 1

Leverage is nothing but the ratio of the company's debts to the actual shares on the whole. One of the best example in this regard is the Goldman Sach's where it has taken more risks by taking more risks over time on the whole. This happened both when it was private as well as funded, however it got to rise a lot keeping the profits in mind on the whole. A high leverage ratio means that the company is using debt and other liabilities to finance its assets A high financial leverage implies when a company's ROA does not exceed the interest on the loan, which greatly diminishes a company's profits as well as equity on the whole. WIth a high operating leverage where the variable costs are higher which implies that the margin of sales is quite low on the whole.