4th Quarter

Incredible!  It's already here!!  We have made it through 3/4's of the year (maybe even a bit more) and the light is finally visible at the end of the tunnel!  With that said, as exciting as 4th quarter arriving can be, it does have the potential to be not only exciting but frightening as well!  Now that the 4th quarter has arrived for you, what are some things you are incredibly excited about with the end of the school year on the horizon and what are some things that you are nervous, concerned about as June arrives?  Is there anything you want to make sure you do/accomplish before you leave M-A for the year?

Thanks for your thoughts - we will get started shortly :)

“Sure, I’d Make That Bet”

“You’re going to make an extra $2 million a year – or $10 million a year – for putting your financial institution at risk. Someone else pays the bill. You don’t pay the bill. Would you make that bet?

Most people who worked on Wall Street said, ‘Sure, I’d make that bet.’” - Frank Partnoy, Inside Job Inside Job criticizes several Wall Street executives who made tens of millions – or hundreds of millions – of dollars, even as their firms collapsed. For example, Joseph Cassano, an officer of AIG’s Financial Products division, received $315 million from 1987 until he retired in March 2008, six months before AIG was rescued by the federal government. Robert Rubin, the former Treasury Secretary and head of Goldman Sachs, made $126 million during eight years as a board member and advisor to Citigroup through 2009.  Companies often award annual bonuses to  employees after a good year. But 2008 was hardly a good year for Wall Street. Profits were down, stock prices plummeted, and many banks nearly collapsed.

In 2008, the federal government implemented the “Troubled Asset Relief Program,” known as TARP, to support the banks. Some argued TARP was unnecessary; others said major banks would have been forced into bankruptcy without it.

Below is a table of the net income (or losses) for 2008 for several of the major financial institutions mentioned in the film, along with the total amount of bonuses those firms paid that year, the number of employees who  received more than $1 million or $10 million in bonuses, and the amount of TARP support each firm received. The dollar amounts are in billions.

For your blog today, again, please discuss the following:

1. Why did these banks pay such large bonuses in 2008
2. What grade would you give the decision to award these bonuses?
3. Finally, how might the prospect of such large bonuses affect the behavior of employees? In theory, people have an incentive to perform well if they make more money when their contribution to their bank’s profits is greater. But what happens to the employees when the bank loses money or collapses? If the banks still pay bonuses, and employees know losses will be borne by investors and taxpayers, will they take on too much risk?

Please be sure to respond to this blog post thoughtfully and thoroughly.  Please also number your responses in your blog post. Thank you!

After completing the post, please complete the following form:

http://goo.gl/o8hknw

It’s Utterly Mad

For centuries, scientists have searched for ways to mix different materials to create gold. In 1995, David Li, a thirty-something math whiz from rural China, was doing something similar with loans. Li was trying to figure out how to mix risky loans together to get risk-free ones.

Surprisingly, his great insight came from death. Li knew about the “broken heart” problem, in which people die more quickly after their spouses die. Li saw an analogy to loan defaults. When one borrower defaulted, others were more likely to default. Not everyone defaulted at the same time, but the defaults were correlated – they moved together to some degree. Li used the same math that statisticians used to model how people reacted when their spouses died to model how different loans reacted when one of them “died,” or defaulted. Li told the Wall Street Journal, “Suddenly I thought that the problem I was trying to solve was exactly like the problem these guys were trying to solve. Default is like the death of a company, so we should model this the same way we model human life.”

According to the math, huge amounts of risk disappeared when you pooled risky assets together in a CDO. The key assumption was that although some loans might default at the same time, not all of them would default simultaneously. For example, if you assumed the chances of two-thirds of the loans defaulting at the same time were close to zero, you could split the CDO into a risky piece (which would bear the first losses when loans in the pool defaulted) and a safer piece (which would not lose any money unless more than one-third of the loans defaulted).  Then, the safer piece would be rated AAA.

The CDO that Allan Sloan describes in Inside Job was based on exactly this assumption. The banks and rating agencies assumed that, although some of the mortgage loans in the pool might default at the same time, the likelihood of more than one-third defaulting together was basically zero. In other words, they assumed the correlation was low.

Historically, this correlation had been low, especially as housing prices rose. But what would happen if the nature of the loans changed (they were made to borrowers with bad credit who put virtually no money down), and then housing prices fell? Even a slight decline in housing prices would pull borrowers underwater, meaning the amount they had borrowed was more than the value of their houses. Then, the correlation would be high. Everyone would default.

The experts who put together subprime CDOs vastly underestimated the correlation of defaults. 

1. Why might they have done this? 
2. Was it an innocent mistake, which surprised the banks and rating agencies as much as it surprised most investors? Or was it an intentional ruse, which generated phantom profits and bonuses, even as it sowed the seeds of financial destruction?
3. How, exactly, was it “mad”?

• The following link takes you to the appropriate clip in Inside Job:
• http://www.youtube.com/watch?v=kzhWodFE7E0

Luck of the Irish

Good Morning and Happy St. Patrick's Day!

While in middle and high school here in America St. Patrick's Day tends to be a day to wear all green and pinch your friends who don't, the holiday is very real and a celebration native to Ireland.  To kick off the morning today, it only seemed appropriate to spend a moment looking into the true meaning of the holiday.  For your post, share what or whom the celebration of St. Patrick's Day actually commemorates and 3 interesting/fun facts you can find about the holiday!

Thanks and we will continue with the Inside Job shortly.

The Inside Job Pt. 1

Good Morning and Happy Friday!

Today we will be beginning the movie the Inside Job.  Among the many awards this movie has received, perhaps its highest honer was an Academy Award for best Documentary Feature.  The movie does a fantastic job of showing the collapse of both the financial system in the US and around the world.  One of the most important factors in this collapse was the home mortgage industry.  For today's post, please respond to the following questions:

What is a loan?  Do you know anyone who has borrowed money to buy a house?  Who lent them the money?  Did the borrower have to make a down-payment?  Why?

In addition, it is important to know that if a borrower has a bade credit history, as about 1 in 4 peoples do, then their loan is known as a "sub-prime" mortgage.  Why would a bank even consider making a sub-prime loan?

With a little background on the issue above, you should have a solid footing in understanding the concepts of this video!  I hope you enjoy, it is a fantastic movie - one of my very favorite documentaries of all time.

Finance Park!

Good Morning!!

Last week you spent two days learning more about taxes, where they go and how they are determined.  What did you find most interesting about this unit?  What are the 3 types of taxes that are collected and how is that money reinvested into our society and/or our government.

As a second part of the post, see if you can find answers to the following questions:

1.  In San Mateo County, how is the amount of property tax due each year determined?
2.  If you were going on an all out shopping spree, which state(s) would you most want to be shopping in?
3.  What, in your opinion, is the best use for income tax money that is collected?

Thanks for your great responses!  I look forward to reading them and discussing them in class.

Creditworthiness

Good Morning and Happy Tuesday!  Today we are going to continue our preparation for watching the movie the Inside Job.  To get started today, discuss in your opinion what creditworthiness is.  Feel free to discuss it on two levels.  What would creditworthiness be in your life as of today and what does creditworthiness describe in regards to people borrowing money from a financial institution?

Thanks and we will get started shortly!

The Simple Post!

Good Morning and Happy Monday!  Today's blog post is simple - find an online blog on a subject you are interested in and share the blog on yours.  After including the link, tell us what the title and subject of the blog is and what you find interesting about it.  Finish off your blog by highlighting how your weekend was, did you do anything particularly fun and/or exciting?

Thanks!  I know it's a little off topic in relation to Economics but a little variety never killed anyone :)

Happy Monday!

Let's Get Rich!

Okay ... well, let's be realistic.  Life brings different opportunities and it is your decision to make choices to better yourself and your situation.  Today's post has two parts:

Part 1:  What do you think would be your investing style if you were to invest in the stock market?  Would you invest and how would you choose your stocks?  Would you choose stocks that are safe and might increase gradually over time or would you be a bit riskier and look for stocks thathave a lot of potential to be successful (but the same chance of failing).

Part 2:  What are some ways you can invest in yourself to ensure you have as many opportunities as possible?  What do you think the keys are to your personal and financial success moving forward?

Happy Friday!

THE STOCK MARKET!!!

Good Morning and HAPPY WEDNESDAY!!!

To kick off the morning, here's a quick scavenger hunt!! Please do a quick internet search and see if you can find the most expensive stock on the stock market today!!  What is a stock and what are some of the pros and cons of investing your money in the stock market!?!?

Thanks and we will get started as a group shortly :)