LS202 Lecture Notes - Lecture 10: Troubled Asset Relief Program, Td Canada Trust, Predatory Lending
13 May 2015
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Example: financial crisis 2007 2008: fraud on a massive scale, no criminal prosecution of executives. 2008-9 bail-out : troubled asset relief program (tarp) = 700 billion: private gain, public risk. Major cause: housing bubble : fraudulent lending practice = fraudulent stock market trades. Apply for mortgage at bank (lender) or mortgage financiers (ex. They examine your financial situation: risk assessment process: underwriting . Lender keeps title to house as collateral (protection) Legally required to keep high reserves: could not lend too much. Is it possible to: reduce risk, and. Step 1: lenders sell mortgages (to investment bank) (ex. Step 2: investment banks bundle mortgages (mortgage-backed security) Aggressively seek high risk loans: financial incentives to do so. Underwriter"s standards disappear: even if mortgage applicant lies, even if all signs point to high risk. Fraud: approval of falsified loan applications, presenting bad loans as good loans.
