Name Instructor Course Date Finance 3353 Test #2 – Part 3 Question 1 Government sponsored enterprise (GSE) refers to corporations formally created by the United States congress with an aim of reducing the cost of capital to targeted sectors of the economy. The key role of the government sponsored enterprises is to improve the flow of credit to the selected sectors of the economy (Burnett et al 27). They are also responsible for improving transparency as well as efficiency of the selected segments in a capital market. Thus improvements would definitely lead to a reduction in risk to both the investors and the capital suppliers. Introduction to the government sponsored enterprises is to create the availability of credit to certain sectors as well as reducing the cost of credit in those sectors such as education home finance and agriculture (Elul & Ronel 13). The two best known government sponsored enterprises include the review of the literature." Banking Crises. Palgrave Macmillan UK 2016. 282-315. www.huduser.gov Božović Miloš Branko Urošević and Boško Živković. "Credit rating agencies and moral hazard." Panoeconomicus 58.2 (2011): 219-227. www.panoeconomicus.rs Buchanan Bonnie G. "The way we live now: Financialization and securitization." Research in International Business and Finance 39 (2017): 663-677. ac.els cdn.com Burnett Kimberly and Linda B. Fosburg. Study of multifamily underwriting and the GSEs' role in the multifamily market. DIANE Publishing (2001): 27-35. www.huduser.gov Elul Ronel. "The government-sponsored enterprises: past and future." Business Review Q1 (2015): 11-20. philadelphiafed.org Krainer John and Elizabeth Laderman. "Mortgage loan securitization and relative loan performance." Journal of Financial Services Research 45.1 (2014): 39-66. link.springer.com Vinsel Lee Jared. "Designing to the test: performance standards and technological change in the US automobile after 1966." Technology and culture 56.4 (2015): 868-894. Wang Hao Hao Zhou and Yi Zhou. "Credit default swap spreads and variance risk premia." Journal of Banking & Finance 37.10 (2013): 3733-3746. http://www.sciencedirect.com/science/article/pii/S037842661300109X [...]
These are short essay questions (350 to 500 words each). Instructions in file 1. Before their scandals, what was the role of the GSEs in terms of standards for underwriting? What were the scandals? What impact did the GSEs have when they re-entered the market? Explain your answers without using the word “scandal” or the phrase “penalty box.” 2. Describe a Credit Default Swap; how does it work and how does it fit into the securitization process? What is the primary risk to the purchaser of a CDS? Explain. 3. What is a Warehouse Line of Credit and how does it fit into the securitization process? Address the players involved and how the line of credit is repaid. What are the risks to the lender? 4. Describe a Collateralized Debt Obligation in terms of how they were constructed and how they differ from a standard MBS. Why were they supposed to have worked? What conditions needed to exist? 5. What role did the ratings agencies play in the securitization process (what was their primary function) and how did they do it? List the primary moral hazard that existed in the ratings process and explain how it became a problem for investors.