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Ebook Money, banking, and the financial system: Part 2

(BQ) Part 2 book "Money, banking, and the financial system" has contents: Transactions costs, asymmetric information, and the structure of the financial system; the economics of banking, investment banks, mutual funds, hedge funds, and the shadow banking system; financial crises and financial regulation; the federal reserve and central banking, monetary policy | CHAPTER 9 Transactions Costs, Asymmetric Information, and the Structure of the Financial System LEARNING OBJECTIVES After studying this chapter, you should be able to: 9.1 Analyze the obstacles to matching savers and borrowers (pages 253–255) 9.2 Explain the problems that adverse selection 9.3 Use economic analysis to explain the structure of the U.S. financial system (pages 267–271) and moral hazard pose for the financial system (pages 255–267) BUYER BEWARE IN FINANCIAL MARKETS! In April 2010, Wall Street was stunned to learn that the Securities and Exchange Commission (SEC), the federal government agency that regulates the securities markets, was suing the Goldman Sachs investment bank for civil fraud. The charges involved sophisticated securities called collateralized debt obligations (CDOs). CDOs are typically composed of mortgagebacked securities and other financial assets. Goldman Sachs had constructed the CDOs, labeled “Abacus 2007-AC1,” from 90 mortgage-backed securities, each of which contained thousands of individual mortgages. Investors who bought the CDOs expected to receive interest payments based on payments made by the mortgage-backed securities, which were in turn based on payments made by the people who had taken out the underlying mortgages to buy houses. Investors would receive a higher interest rate on the CDOs than they would have received on a default-free U.S. Treasury bond. In exchange for this higher interest rate, investors accepted the risk that Continued on next page Key Issue and Question At the end of Chapter 1, we noted that the financial crisis that began in 2007 raised a series of important questions about the financial system. In answering these questions, we will discuss essential aspects the financial system. Here are the key issue and key question for this chapter: Issue: During the 2007–2009 financial crisis, many economists noted that problems in the market for bonds had the potential to deepen the economic recession