Law Assignment

Law Assignment Words: 800

The universal lending system is the system that you borrow money from a bank, Credit Card Company, other credit providers and you pay them back with interest within a certain period. With mortgages, it takes many years to pay back the money, so the lenders have to watch the money very carefully to ensure they get the money back.

To be able to lower the risk for lenders, the US banks figure out an idea which the lenders sell their mortgage from the borrowers to investment banks like Morgan Stanley, Lehman Brothers, and Goldman Cash, then the investment bank combine hose mortgage to create a complex derivatives called a Collateralized Debt Obligation (COD) and sell the COD to investors around the world. Investment bank pay rating agency to evaluate COD and many of them are given a triple A rating so that the COD is pretty popular among the investors.

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However, problems emerge when the lenders realize that they could give away endless loans because they will sell these loans to investment banks anyway. The bubble starts when people receive loans while they are not able to pay them back. You can try to image that there are husbands of bad loans are being combined into COD that appear to be worth billions of dollars but will become worthless because the borrowers are not able to pay the debt. You realize that the bubble is a bomb which can collapse the investment bank system and even the whole financial system.

That is why Lee Hussein Long said: when you can create something out of nothing, it is difficult to resist. Question 2: The first regulation regarding the retail bank is equity lending. The leverage ratio is limited when the market is regulated. However, after the deregulation policy implemented, the SEC lifts the limit on leverage giving the investment bank opportunity gambling a lot of more by allowing them sharply increasing their borrowing. The second regulation regarding the retail bank is fractional reserve bank system.

The minimum amount required in reserve at banks is 10% when it is regulated. After deregulation, it becomes 2%. Question 3: The four sections of financial services are financial conglomerate, investment bank, insurance company, and rating agency. 1) Firstly, after US government has implemented the deregulation policy, it allows the lenders to sell their loans from the borrowers to investment banks; the investment banks then combine those loans to Cods selling to the investors.

That causes problems in the sense that the lenders do not need to watch their money carefully anymore, they do not care about whether the loans can be paid back or not because they sell those loans to the investment banks anyway, and the investment bank does not care the quality of the loan either. The more loans they sell, the more money they will get. Those loans appear to be worth lions of dollars but it will become worthless in the future.

Also, the deregulation lifts the leverage limit on the investment bank that allows the investment to borrow law assignment By adds insurance company like Alga sells the credit default swap to the investors who own Cods and promise that they will pay the investors back if the CODS go bad. However, speculators who do not own the CODS also can buy the credit default swap in order to bet against the Cods going bad. Due to the deregulation policy, the Alga does not have to put aside any money for the potentially losses. But if the Cods later go bad, the Alga will be on the hook.

Finally, the financial industry is created and understood by few financial insiders; some of those insiders are very greedy and selfish. Under the deregulation policy, there are no major investigations of the investment banks; it gives those greedy insiders opportunity to get huge income from the financial industry. Although they know that they bear a huge risk making that money, but they still do it without considering about the serious consequences. 2) George Sorts thinks that the financial market is potentially unstable like a huge oil inker.

Many compartments should be designed for storing the oil to be able to prevent the oil sloshes around capsizing the boat. The effective regulation policy works like the compartments inside the huge oil tanker, it prevents the financial system from collapsing even though some parts of the financial systems are wrong. On the other hand, the deregulation lead to an end with compartmentalizing using one single oil tanks to store the oil instead of using many compartments, so the whole system can easily collapse even though there is only one single part doing wrong.

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