EC250 Lecture Notes - Lecture 2: Investment Banking, Adverse Selection, Adjustable-Rate Mortgage
Document Summary
Was not as bad as feared, peaked at 8% in canada compared to great depression at 20% Allowed to fail bc of concern about moral hazard. Expected that if they failed the government would bail them out. Jp morgan made a deal with federal reserve the brothers were allowed to fail bc the largest banks were interested in taking over. Moral hazard: (cid:272)o(cid:373)pa(cid:374)y does(cid:374)"t ha(cid:448)e to (cid:271)ea(cid:396) all (cid:272)o(cid:374)se(cid:395)ue(cid:374)(cid:272)es of its a(cid:272)tio(cid:374)s. If a (cid:271)a(cid:374)k (cid:373)akes a (cid:396)isky (cid:271)et a(cid:374)d it (cid:449)o(cid:396)ks out (cid:449)ell, it"s a (cid:449)i(cid:374)-win. If the bet is bad, the bank would be bailed out. Banks get the full upside and they get flipside (tax payers money) The bank is supposed to find all the good credit risks to give mortgagees to, but they no longer care. The (cid:395)uality of the loss is (cid:374)ot (cid:862)you(cid:396)s(cid:863) Viability: the total value of assets exceeds total value of liabilities minus capital.
