Required Viewing: Too Big To Fail, Directed by Curtis Hanson, 2011.

Based on Andrew Ross Sorkins Book: Too Big To Fail: The Inside Story of
How Wall Street and Washington Fought to Save the Financial System
and Themselves, 2009.

Assignment: While viewing the movie Too Big to Fail, answer the following questions.

1. Impact of the Credit Crisis on Financial Market Liquidity

Explain the link between the credit crisis and the lack of liquidity in the debt markets.
Offer some insight as to why the debt markets became inactive. How were interest rates
affected? What happened to initial public offering (IPO) activity during the credit crisis?
Why?

2. Mortgage-Backed Securities and Risk Taking by Financial Institutions

Do you think that the institutional investors that purchased mortgage-backed securities
containing subprime mortgages were following reasonable investment guidelines?
Address this issue for various types of financial institutions such as pension funds,
commercial banks, insurance companies and mutual funds (your answer might differ with
the type of institutional investor). If financial institutions are taking on too much risk, how
should regulations be changed to limit such excessive risk taking?

3. Pension Fund Investments in Lehman Brothers Debt

At the time that Lehman Brothers filed for bankruptcy, financial institutions serving
municipalities in California were holding more than $300 billion in debt issued by Lehman.
Do you think that municipal pension funds that purchased commercial paper and other
 debt securities issued by Lehman Brothers were following reasonable investment
guidelines? If a pension fund is taking on too much risk, how should regulations be
changed to limit such excessive risk taking?

4. Future Valuation of Mortgage-Backed Securities

Commercial banks must periodically mark to market their assets in order to determine
the capital they need. Identify some advantages and disadvantages of this method, and
propose a solution that would be fair to both commercial banks and regulators.

5. Future Structure of Rating Agencies

Rating agencies rated the so-called tranches of mortgage-backed securities that were sold
to institutional investors. Explain why the performance of these agencies was criticized,
and then defend against this criticism on behalf of the agencies. Was the criticism of the
agencies justified? How could rating agencies be structured or regulated in a different
manner in order to prevent the problems that occurred during the credit crisis?

6. Sale of Bear Stearns

Review the arguments that have been made for the government-orchestrated sale of
Bear Stearns. If Bear Stearns had been allowed to fail, what types of financial institutions
would have been adversely affected? In other words, who benefitted from the
governments action to prevent the failure of Bear Stearns? Do you think Bear Stearns
should have been allowed to fail? Explain your answer.

7. Bailout of AIG
Review the arguments that have been made for the bailout of American International
Group (AIG). If AIG had been allowed to fail, what types of financial institutions would
 have been adversely affected? That is, who benefitted from the bailout of AIG? Do you
think AIG should have been allowed to fail? Explain your answer.

8. Executive Compensation at Financial Institutions

Discuss the compensation received by executives at some financial institutions that
experienced financial problems (e.g., AIG, Bear Stearns, Lehman Brothers, Merrill Lynch,
Washington Mutual). Should these executives have been allowed to retain the bonuses
they received in the 2007-2008 period? Should executive compensation at financial
institutions be capped? (Dont forget to consider the marketability of talent in the
industry when forming your response. The solution is not as simple as many think.)

9. Role of the Treasury and the Fed in the Credit Crisis

Summarize the various ways in which the US Treasury and the Federal Reserve intervened
to resolve the credit crisis. Discuss the pros and cons of their interventions. Offer your
own opinion regarding whether they should have intervened.