Concept
-
Often when we see failure in financial markets it’s usually quite clear (after the fact) what the cause was. Often times there is under-regulation to some degree, and the aftermath of the failure sees the enactment of new policy to ‘plug the gap’ which caused failure(s). Take the banking crisis of 2008 for example, investment banks, insurance companies and ratings agencies were colluding and trading in high risk investment products with insufficient collateral to cover their losses. The policy created to counter this was known as Dodd-Franks which – among many other things - stipulated capital reserve requirements for banks, to ensure they could cover their debt obligations.
The Savings and Loan crisis of the 1980s and 1990s however, was not triggered by poor policy necessarily, but instead came about due to inflationary/stagflationary* pressures at the time. Policy makers then attempted to manage this inflation risk through regulatory changes which ultimately lead to the demise of the entire savings and loan market.
Your task is to read the articles below and use your insight into market regulation to provide answers to the following questions:
Identify key role players from the inception to the demise of the S&L market. (15% of total points)
Identify and analyze shortfalls of the regulation which affected the S&L market. Your answer does not need to be contained to the crisis years. (15% of total points)
In reference to article 2, make an argument for which level of regulation the article describes (see Lecture 2 M2) the Garn-St.Germain Depository Institutions Act was. (15% of total points)
What did the Enron crisis and the Savings & Loan crisis have in common? (15% of total points)
How were the ethics violations different in the Enron crisis and the S&L crisis? (15% of total points)
Pick either Enron crisis OR S&L crisis (NOT BOTH) that you think the problem is more difficult to fix. Give a reason. (15% of total points)
The structure and presentation of your submitted paper will be evaluated as well (see grading rubric). (10% of total points)
*Stagflation is a process whereby an economy experiences stagnation in wages, employment and economic activity, while still experiencing high or growing inflationary pressure.