1) The Glass-Steagall Act was created after the Great Depression. Why was the Ac
ID: 1102504 • Letter: 1
Question
1) The Glass-Steagall Act was created after the Great Depression. Why was the Act created? What was the reason for removing the Act in 1999? 2) Moral hazard is an example of asymmetric information and we saw how moral hazard allowed banks to make riskier loans then they should have. Moral hazard also exists in other industries such as health and life insurance. Find and explain a moral hazard from an industry beyond the banking industry. CMO's (collateralized mortgage obligation) is a form of securitization. How did these products lead to a positive growth in the housing market? 3) Leverage is a way to increase the buying or investing possibilities for investment firms. Explain how leverage worked in the CMO market and the positive or negative affect it had on the housing market. 4) 5) CDS's (credit default swaps) were used by investment firms who invested in CMO's. What are these products and how were they used? Were they successful in regard to what the firms created them for? 6) The US economy has been growing steadily with unemployment at low levels and the stock market at or near record highs.What are your expectations about the state of the economy and the financial markets going forward?Explanation / Answer
1) Glass Steagall Act was created on June 16, 1933. It separated commercial banking from investment banking and required commercial banks to eliminate their securities affiliates. The act was created in the wake of great depression, stock market crash and banking failure.
The act was removed in the wake of many structural changes in banking and financial sector that could cope with the act and thus was replaced by Gramm Leach Bliley Act.
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