...Credit Crunch of 2007: What Went Wrong? Why? What Lessons Can Be Learned? First draft: September 2008 This draft: May 2009 John C. Hull* Joseph L. Rotman School of Management University of Toronto Abstract This paper explains the events leading to the credit crisis that began in 2007 and the products that were created from residential mortgages. It explains the multiple levels of securitization that were involved. It argues that the inappropriate incentives led to a short‐term focus in the decision making of traders and a failure to evaluate the risks being taken. The products that were created lacked transparency with the payoffs from one product depending on the performance of many other products. Market participants relied on the AAA ratings assigned to products without evaluating the models used by rating agencies. The paper considers the steps that can be taken by financial institutions and their regulators to avoid similar crises in the future. It suggests that companies should be required to retain some of the risk in each instrument that is created when credit risk is transferred. The compensation plans within financial institutions should be changed so that they have a longer term focus. Collateralization through either clearinghouses or two‐way collateralization agreements should become mandatory. Risk management should involve more managerial judgment and rely less on the mechanistic application of value‐at‐risk models. *e-mail: hull@rotman.utoronto...
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...Credit Crunch of 2007: What Went Wrong? Why? What Lessons Can Be Learned? First draft: September 2008 This draft: May 2009 John C. Hull* Joseph L. Rotman School of Management University of Toronto Abstract This paper explains the events leading to the credit crisis that began in 2007 and the products that were created from residential mortgages. It explains the multiple levels of securitization that were involved. It argues that the inappropriate incentives led to a short‐term focus in the decision making of traders and a failure to evaluate the risks being taken. The products that were created lacked transparency with the payoffs from one product depending on the performance of many other products. Market participants relied on the AAA ratings assigned to products without evaluating the models used by rating agencies. The paper considers the steps that can be taken by financial institutions and their regulators to avoid similar crises in the future. It suggests that companies should be required to retain some of the risk in each instrument that is created when credit risk is transferred. The compensation plans within financial institutions should be changed so that they have a longer term focus. Collateralization through either clearinghouses or two‐way collateralization agreements should become mandatory. Risk management should involve more managerial judgment and rely less on the mechanistic application of value‐at‐risk models. *e-mail: hull@rotman.utoronto...
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...FIFTH EDITION 2005 Transforming Real Estate Finance A CMBS Primer Primary Analysts: Howard Esaki Marielle Jan de Beur Masumi Goldman This book is an overview of the Commercial Mortgage-Backed Securities (CMBS) market. The contents of this publication are over eight years in the making and include excerpts of research reports from as early as 1997. In this fifth edition of our primer, we have reorganized the chapters to highlight the different investment options within CMBS. New material since our last edition includes sections on the various types of AAA CMBS classes, total rate of return swaps, floating rate large loan transactions, and an updated version of the commercial mortgage default study. We hope you find this book useful and welcome comments so that we can improve future editions. FIFTH EDITION 2005 Transforming Real Estate Finance A CMBS Primer Primary Analysts: Howard Esaki Marielle Jan de Beur Masumi Goldman The Primary Analyst(s) identified above certify that the views expressed in this report accurately reflect his/her/their personal views about the subject securities/instruments/issuers, and no part of his/her/their compensation was, is or will be directly or indirectly related to the specific views or recommendations contained herein. This report has been prepared in accordance with our conflict management policy. The policy describes our organizational and administrative arrangements for the avoidance, management and disclosure...
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...credit rating had been downgraded to BBB-. The firm needed $50,000,000 to fund its continuing operations and aimed to lend long-term (8-10 years) debt at a fixed rate. Treasury rates were at 10.1 % and BF Goodrich anticipated paying approximately 12% to 12.5%. The firm was not willing to stipulate an agreement with its current bank, in order not to comprise the flexibility of its future choices. Goodrich wanted a fixed rate, but they believed it would have to pay about 13% for a 30-year corporate debenture. Rabobank Rabobank is one of the largest Dutch banks, consisting of more than 1,000 small agricultural banks. The bank was interested in securing floating rate financing on approximately $50,000,000 in the Eurobond market. Considering their AAA rating, Rabobank could issue fixed rate in the Eurobond market for 11% and for a floating rate of LIBOR plus 25 basis points. Without an active swap market it was common for swaps to be arranged between the two counter parties. Rabobank was interested in the deal but feared the credit risk, as Goodrich’s credit rating had recently been downgraded to a BBB- status. A direct swap would therefore expose Rabobank to credit risk. The two finally reached an agreement to use Morgan Guaranty as an intermediary. The following diagram shows all the transactions. Note: all the observed rates are semiannual. Morgan Guaranty...
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...8V1 Ø 10, T1 Ø 298, P1 Ø 10, P2 Ø 1, R Ø 8.3144, Rla Ø 0.082057, n Ø 4.08948< Finally, this constant will convert liter-atm energy units to Joule energy units. All results are given in Joules: laToJ = 101.325 ; ü 1. Reversible, Isothermal Process In an isothermal process for an ideal gas, DU = 0 ; DH = 0 ; thus heat and work are equal and given by: P2 q = w = n R T1 LogA ÅÅÅÅÅÅÅ E J ê. subs P1 -23330.9 J 16 Notes on Gaskell Text ü 2. Reversible Adiabatic Expansion In an adiabatic expansion q = 0; and P V g is a constant. Thus the final state has 1êg g P2 V2 i P1 V1 y Å ; T2 = ÅÅÅÅÅÅÅÅÅÅÅÅÅ ê. g -> 5 ê 3 Å V2 = j ÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅ z j z n Rla k P2 { P1 V 1 P2 I ÅÅÅÅÅÅÅÅÅÅÅÅÅ M P ÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅÅ2 ÅÅÅÅÅÅÅÅÅ ÅÅÅÅÅÅÅÅ Å n Rla 5ê3 3ê5 For an ideal gas cv = 3R/2; thus 3 DU = ÅÅÅÅ n R HT2 - T1 L ê. subs 2 -9147.99 or we can use 3 DU = ÅÅÅÅ HP2 V2 - P1 V1 L laToJ ê. Append@subs, g -> 5 ê 3D 2 -9148.02 For some numeric results, the final temperature and volumes were ad2 = N@8V2 , T2 < ê. Append@subs, g -> 5 ê 3DD 839.8107, 118.636< The work done is dw = -DU 9148.02 For an ideal gas c p = 5R/2; thus the enthalpy change is 5 DH = ÅÅÅÅ HP2 V2 - P1 V1 L laToJ ê. Append@subs, g -> 5 ê 3D 2 -15246.7 or Notes on Gaskell Text 17 5 DH = ÅÅÅÅ n R HT2 - T1 L ê. subs 2 -15246.7 For numerical results in the subsequent...
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...December 2015 - FINAL EXAMINATION SCHEDULE Please verify the location of your exam below. CAREFULLY ensure that you note the correct room according to your LAST NAME ACCT Sec Title ACCT 351 001 Intermediate Financial Acct 1 ACCT 351 Time Prof. FROM Dec 21 6 pm Tsang Aaa - Zzz GYM main gym 20-30 002 Intermediate Financial Acct 1 Dec 21 6 pm Tsang Aaa - Zzz GYM main gym 20-30 ACCT 351 003 Intermediate Financial Acct 1 Dec 21 6 pm Tsang Aaa - Zzz GYM main gym 20-30 ACCT 352 001 Intermediate Financial Acct 2 Dec 21 9 am Cecere Aaa - Zzz ENGTR 0100 ACCT 354 001 Financial Statement Analysis Dec 22 2 pm Scott Aaa - Zzz GYM Fieldhouse 28-31 ACCT 354 002 Financial Statement Analysis Dec 22 2 pm Scott Aaa - Zzz GYM Fieldhouse 28-31 ACCT 361 001 Management Accounting Dec 11 2 pm Parent Aaa - Zzz GYM main gym 1-11 ACCT 361 002 Management Accounting Dec 11 2 pm Parent Aaa - Zzz GYM main gym 1-11 ACCT 361 003 Management Accounting Dec 11 2 pm Parent Aaa - Zzz GYM main gym 1-11 ACCT 362 001 Cost Accounting Dec 17 2 pm Levy Aaa - Zzz GYM Studio 1 1-3 ACCT 385 001 Principles of Taxation Dec 15 2 pm Goldsman Aaa - Zzz GYM BLEACHERS 1-5 ACCT 385 002 Principles of Taxation Dec 15 2 pm Goldsman Aaa - Zzz GYM BLEACHERS 1-5 ACCT 453 001 Advanced Financial Accountin Dec 14 9 am Scott Aaa - Zzz GYM main gym ACCT 463 001 Management Control Dec 11 2 pm Levy Aaa - Zzz GYM Studio 2...
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...Department of Economics, University of Vienna, WP No. 9803, Br€nnerstrasse 72, 1210 Vienna, Austria u Received 12 October 2000; accepted 5 November 2001 Abstract This paper investigates the relationship between dividends and the ownership and control structure of the firm. For a panel of Austrian firms over the 1991/99 period, we find that statecontrolled firms engage in dividend smoothing, while family-controlled firms do not. The latter choose significantly lower target payout levels. Consistently, state-controlled firms are most reluctant and family-controlled firms are least reluctant to cut dividends when cuts are warranted. The dividend behavior of bank- and foreign-controlled firms lies in between stateand family-controlled firms. This is consistent with the expected ‘‘ranking’’ of information asymmetries and managerial agency costs. The above results hold for firms with good investment opportunities. We find that firms with low growth opportunities optimally disgorge cash irrespective of who controls the firm. Ó 2002 Elsevier Science B.V. All rights reserved. JEL classification: G3; L2; D9 Keywords: Corporate governance; Dividend policy; Simultaneous equations 1. Introduction In March 1999, Richard Schenz, the CEO of OMV AG, the largest Austrian corporation, announced a dividend increase of 10% despite the fact that ordinary earnings had declined by 47%. In April 2000, Claus Raidl, the CEO of B€hler–Uddeholm o AG, an Austrian steal company, announced an earnings drop of 31%, nevertheless ...
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...For exclusive use , 2015 9-201-067 REV: MAY 4, 2010 BENJAMIN ESTY MICHAEL KANE BP Amoco (B): Financing Development of the Caspian Oil Fields One of the many challenges facing the Finance Group after the BP/Amoco merger in 1998 was to evaluate and, if necessary, restructure the company’s global investment portfolio, including its 34% share of the Azerbaijani International Oil Consortium (AIOC). The 11-firm consortium was in the process of developing oil fields in the Azerbaijani sector of the Caspian Sea (Exhibit 1 identifies the AIOC members). As of March 1999, AIOC had completed the $1.9 billion Early Oil Project, which was producing 100,000 barrels of crude oil per day (bpd). The next three stages, known as the Full Field Development Project, were expected to cost an additional $8 to $10 billion and would bring total production to 800,000 bpd by 2005.1 Before the merger, BP and Amoco held the two largest interests in AIOC (17% each), yet they had chosen different strategies for funding their shares of the Early Oil Project. Whereas BP had used general corporate funds, Amoco was one of five AIOC partners that had raised $400 million of project finance with assistance from two multilateral agencies. Now, as a merged entity, the Finance Group had to reassess the firm’s financial strategy for the Early Oil Project and determine the best way to finance the Full Field Development Project. While it was possible to continue with a dual financing strategy,...
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...EMBA 810 Financial Statement Analysis Final Exam Summer 2014 – EMBA 20 12 July 2014 United Parcel Service Initial Public Offering Case Analysis Darrell W. Kent, Jr. 1. What are the key success factors and risks for UPS given its business strategy? United Parcel Service’s (UPS) strategy is to be the market leader within the package delivery industry with operations primarily focused on international air and ground package delivery services and secondary focus on the logistics and supply chain management services. UPS management is now prepared and ready to bring UPS from a privately owned firm to a company that is publicly traded on American and international stock exchange markets. The key success factors for UPS are as follows: i. Strong financial performance. ii. Low-Risk AAA Rating. iii. Technological leadership. iv. Operational advantage – centralized air and ground operations. v. Employee owned structure, with very strong loyalty and minimal conflicts of interest. The key risk factors for UPS are as follows: i. Unionized workforce – 58% of UPS employees and these employees are able to maintain flexible work arrangements. ii. Weak presence in the air express market. iii. Between 1998 and 1999, UPS spent more than $1billion dollars per year upgrading its infrastructure. iv. Expansion of the scope of the business with the formation of UPS Logistics Group. 2. Where, if at all, do the financial statements reflect these...
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...Stem Cell Research Legislation and the Related Legal Issues LAWS 310, Legal Environment Course Project Week 6 October 4, 2011 “In the beginning there is the stem cell; it is the origin of an organism's life. It is a single cell that can give rise to progeny that differentiate into any of the specialized cells of embryonic or adult tissues.” STEWART SELL, Stem Cells Handbook Have you ever thought that humans would eventually see the day where we could cure the incurable? That there would be a solution to cancer, AIDS, and birth defects? A miracle among human beings is being researched and it is thanks to stem cell research. Human Embryonic Stem Cell Research (ESCR) is probably the most significant and compelling area of medical research today, whether in reality, or perception, or both. Stem cell research is used for investigation of basic cells which develop organisms. The cells are grown in laboratories where tests are carried out to investigate fundamental properties of the cells. Any step of advancement in this research can create a cure in the world of sickness in ways that were only imagined (Haydock, DeJesus, 2011). The use of stem cells could potentially cure diabetes, Parkinson's disease, spinal cord injuries, heart conditions, and more. The history of stem cell research has endured quite a journey. From being a breakthrough in science to being banned by the President, Embryonic Stem Cell Research has come a long way in the fight to be viewed as ethical and...
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...Write a 3-5 page papner describing the application of interest arbitration with regard to public sector employment. Within the assignment describe a recent high profile bargaining process between a union and a public sector employment organization (hospital, police, air traffic controllers, and teachers) in which issues were not resolved and the unresolved issues were sent to an impartial arbitrator for a final decision. Do you agree with the final ruling? Please support your stance with academic research. Please support your assignment with research and submit in APA format. Additionally, please submit your assignment in a paper format with a list of references (using APA standards) at the end of the assignment. Application of Interest Arbitration with Regard to Public Sector Organization Schuyler McKenzie One of the most popular method of solving disputes is through arbitration. American Arbitration Association (AAA) is the most popular arbitration in the world, as it has over 800 employees in 35 offices worldwide and represents over 8,000 arbitrators and mediators worldwide. Arbitration is actually an extremely old form of settling disputes between people, businesses, as well as between nations. The process itself is a private method of adjudication, which uses at least one arbitrator to resolve the dispute. Several companies have resulted to using arbitrational clauses within their contracts, as they have become more plentiful...
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... the paper argues that the current situation in the housing market is a legacy of the way in which the housing market developed over the early 2000s into the 2007 and 2008 financial crisis. As the fall out from this crisis has taken two or three years to properly be felt it can currently be said to be exerting a major influence on the way the housing market in the UK is working today. The paper therefore places a major focus on developing an understanding of how the financial crisis occurred and the impact that this had on the UK housing market, in order to understand the key factors which are shaping the housing market today. The paper begins with a look at the state of the UK economy at the moment. This is only examined in brief but provides a key background to the work. This is then followed by a look at the UK economy and the housing market and how the two link together. The following section is the major section of the work as this focuses on the macroeconomic factors which have shaped the housing market. This section in particular focuses on the legacy of the housing market developments of the early 2000s. The following section briefly explores the microeconomic elements which have shaped the housing market – the major emphasis here is on the role of buy to let mortgages as a means of investing. This is then followed by the final critical reflection before the work concludes. The state of the UK economy Like most markets, the housing market is heavily influenced by the state...
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...* PV(CF) = CF/(1+r)t AKA PV = FV/(1+r)t * NPV = PV(CFs) – Investment = -C0 +C1/(1+r)+C2/(1+r)2+C3/(1+r)3+… = ∑(Expected CFt)/(1+r)t – Investment * Perpetuity – pays a fixed amount C per period forever * P(C,r) = C/r requires cash flow to begin NEXT period. If begin now, then PV = C + C/r * Annuity – fixed stream of cash flows that has a final period t * A(C,r,t) = C/r [1-1/(1+r)t] * Growing Perpetuity – G(C,r,g) = C/(r-g) C is initial cash flow, r is discount rate, g is growth rate * P/E = 1/(r-g) * High P-E multiple means the firm has good growth opportunities (high g), investments have low risk (low r), or both * Computing NPV – obtain the proper CF to use in the calculation * Rule: Determine all CF which will be realized if the project is taken. Subtract from this the CF that will be realized if the project is not taken. Result represents the CF impact of the project. The present discounted value of these incremental CF is the NPV of the project * CF = EBIT – Taxes + Depreciation – Capital Expenditures (CAPX) * EBIT (Earnings Before Interest & Taxes) = Revenues – Cost – Depreciation * EBIAT = EBIT * (1-TaxRate) * Taxes = CorpTaxRate * (Revenues – Costs – TaxShield) * FinalCF = SellingPrice – Taxes * NWC = Current Assets – Current Liabilities (change in NWC must = 0) * Projects of greater risk must have a higher discount rate as investors demand more return to compensate them for added...
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... we see that there is something more to be explained. According to the Global Financial Stability Report of the International Monetary Fund (IMF) of October 2008, losses on non-prime mortgage-backed securities in US residential real-estate amount to some 500 billion dollars. This figure is both too small and too large. The figure is too small in the sense that losses of 500 billion dollars by themselves cannot explain why the financial system worldwide has been so devastated by the crisis. Around 1990, losses of savings and loans institutions in the United States were said to amount to some 600 to 800 billion dollars. A decade later, losses on NASDAQ and on the New York Stock Exchange amounted to 1.6 trillion dollars in the calendar year 2000, 1.4 trillion dollars in the calendar year 2001, and again 2.7 trillion dollars in the calendar year 2002. Neither episode caused a worldwide financial crisis. At the same time, the figure of 500 billion dollars of losses on non-prime mortgage-backed securities is * Max-Planck Institute for Research on Collective Goods, Bonn. 1 The following text is based on the Jelle Zijlstra Lecture which I gave in Amsterdam on May 27, 2008. The text of the lecture will be published by the Netherlands Institute for Advanced Study. A preliminary version is available at...
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...Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I illycaffè: Value Creation through Responsible Supplier Relationships Francesco Perrini and Angeloantonio Russo SDA Bocconi Francesco Perrini and Angeloantonio Russo prepared this case study, as a basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation. Copyright © 2007 SDA Bocconi University and EABIS. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the express permission of SDA Bocconi University and EABIS. About the Project This case was written as part of a project on “Curriculum Development for Mainstreaming Corporate Responsibility,” coordinated by INSEAD and London Business School and supported by the European Academy of Business in Society (EABIS). The project aims to develop degree and executive programme designs and teaching materials that will assist the process of mainstreaming the area of corporate responsibility into core disciplines in management education and increasing its inter-disciplinarity. Within this context, EABIS members from across Europe have been invited through an open call to submit case proposals with the intention of developing a range of cases across a number of subject areas for use by mainstream faculty. The open...
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