...caused the most havoc in this lending crisis scenario was articulated beautifully by Bazarman and Moore as The Confirmation Trap. The Confirmation Trap boils down to whether or not a person merely searches for data that supports the decision they wish to make rather than looking for proper, empirical data to prove the assumption correct. In other words, does a person looking to make a decision actually look to prove their assumption incorrect. Sadly, at nearly every stage and at every level of the subprime lending fiasco there is evidence that all the players fell victim to The Confirmation Trap. Wason writes, “ . . . that obtaining the correct solution necessitates a willingness to attempt to falsify hypotheses, and thus to test those intuitive ideas which so often carry the feeling of certitude.” None of the characters in our story sought to find the faults in their assumptions rather they simply found the proof of what they desired to achieve. The NPR program began with detailing the process by which people borrowing money in the early 2000’s went through to receive their toxic loans. Clarence Nathan, making $37k a year and owning no assets obtained a loan for $540k. Clearly, this man had no business being...
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...HSBC’s Mortgage Lending Decisions and the Big Melt It isn’t often that the American financial system, and its world counterpart, has a near- death experience. The last time was the 1930s. Beginning in 2007 and extending through 2009, American and global financial systems failed, melted down, and were rescued only by concerted central bank interventions in all the major industrial countries. The United States directly invested about 1 trillion dollars in U. S. financial institutions, and guaran-teed an estimated $ 14 trillion dollars in private debt. The complete history of this period has not been written. Many causes, involving many different actors, have been identified. Some have likened the big melt to a “ perfect storm” where a number of storm systems just happened to combine to form a much larger, lethal storm. But one cause was the failure of decision- making models, both the model builders and the financial man-agers who relied on those models. One of the major players in this crisis was HSBC Holdings PLC, the third largest bank in the world based on market value, and the largest bank in Europe. In the financial meltdown of 2008— 2009, HSBC joined the other major money center banks in a collective failure. HSBC weathered the turmoil in the financial markets better than most of its rivals, mainly because it had profited from continuing growth in Asia, where it generates about 65 percent of its pretax profit. But the company’s stock prices have fallen by half from their...
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...inventory will be $17,000 per day for 305 working days for the coming fiscal year. The money she borrows during the year must be repaid with 9% interest rate by the end of the year. The bank also charges the company a loan origination fee of $1,200 plus 2.25% ………. Christine wants to determine an optimal borrowing policy with the use of the EOQ analysis method. She also wants to determine the amount of the loan she should secure from the bank, the total annual cost of the company’s borrowing policy, and the number of loans the company should obtain during the year. She also wants to know the level of the cash on hand at which the company should apply for a new loan when it takes 15 days for the process. In addition, she wants to know the company’s optimal loan amount in case the bank offers a discount of 0.25% by lowering down the points charged from 2.25% to 2.00% if any loan amount exceeds $500,000. ANALYSIS To determine the loan amount per loan, total cost of borrowings to the company, the reorder point and whether discount policy benefits or no, the EOQ model analysis is perform. The total cost of the borrowing is determined by considering the parameters like demand, carrying cost and ordering cost. The 2.25% is not included in the calculations of loan amount per loan as it is the cost on...
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...Executive Summary After analyzing the numbers and the market and property factors involved with Shady Trail, it is my opinion that this property is a reasonable one to invest in. It meets the criteria we had previously set forth in choosing an investment property as both the IRR and the current cash flows are in excess of the minimum we mandated. These numbers require that the assumptions we use in market rent, cap rate in 2003, vacancy rate, and our plans to sell the investment after 5 years all hold. If one of these assumptions doesn’t hold and the 5-year projection is below expectations, it can still be remedied by holding the asset for a longer time period. Assumptions/Issues The principal issue in the completed analysis is the extent to which the assumptions are accurate. To make a recommendation based on the financial information provided, it is necessary that the assumptions used are held. Namely, the difference between the assumed vacancy rate of 5% and the average industrial vacancy rates of 6-7% would fundamentally change my recommendation, as the financial analysis of these two scenarios will show in the report. Additionally, there is also a difference in holding the property for 5 years versus holding it for 10 years, and it is worthwhile to explore these two circumstances in conjunction with the differing vacancy rates to assess the best course of action to take with Shady Trail. The property itself is in line with what we are looking to invest in. Since there...
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...caused the most havoc in this lending crisis scenario was articulated beautifully by Bazarman and Moore as The Confirmation Trap. The Confirmation Trap boils down to whether or not a person merely searches for data that supports the decision they wish to make rather than looking for proper, empirical data to prove the assumption correct. In other words, does a person looking to make a decision actually look to prove their assumption incorrect. Sadly, at nearly every stage and at every level of the subprime lending fiasco there is evidence that all the players fell victim to The Confirmation Trap. Wason writes, “ . . . that obtaining the correct solution necessitates a willingness to attempt to falsify hypotheses, and thus to test those intuitive ideas which so often carry the feeling of certitude.” None of the characters in our story sought to find the faults in their assumptions rather they simply found the proof of what they desired to achieve. The NPR program began with detailing the process by which people borrowing money in the early 2000’s went through to receive their toxic loans. Clarence Nathan, making $37k a year and owning no assets obtained a loan for $540k. Clearly, this man had no business being...
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...Time Context: December 7, 2008 I. Problem Statement: 1. How can GOCB renew their strategy? 2. How can GOCB deal with their unstable status? 3. How GOCB will resolve the problem of the ethical responsibilities of the officers? II. Statement of Objective: To recover the loss valued at P5.0 billion by requesting a loan from BSP which carry a lower interest rate and fees, payable in 10 years time. III. Areas of Consideration: Strengths | Weaknesses | Opportunities | Threats | • GOCB was very innovative company which can easily adapt changes happen in the society to satisfy and meet the customer’s needs.• Expanded in the areas trading bonds and stocks.• GOCB’s Stocks were of high value also with strong reputable brand name, financial strength and strategic fit.• GOCB posted the 6th highest growth in NPLs and NPAs respectively. | • Heavily relying on the inter-bank loans granted by RCB to cover its overdraft. • Unable to build up earning assets as funds/ deposits generated.• Unfaithfulness and abuse of confidence of the officers who took advantage of their respective positions by making it appear that certain companies and individuals obtained a loan from the bank.• Having favoritism in the company where competent employees have resigned due to uncertainties of their employment status. | •The commercial banking remains...
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...Harvard Business School 9-291-026 Rev. October 29, 1993 Note on Bank Loans Bank loans are a versatile source of funding for businesses. For example, these loans can be structured either as short- or long-term, fixed or floating rate, demand or with a fixed maturity, and secured or unsecured. While each potential borrower's business is unique, reasons to borrow generally include the purchase of assets including new fixed assets or entire businesses, repayment of obligations, raising of temporary or permanent capital, and the meeting of unexpected needs. Loan repayment generally comes from one of four sources: operations, turnover or liquidation of assets, refinancing, or capital infusion. This note describes traditional bank lending products, the role of the lending officer, credit evaluation, and the structuring of credit facilities and loan agreements. Specialized loan and credit products are described in Appendix A. Traditional Commercial Bank Lending Products While increased competition has forced banks to develop innovative credit facilities and financing techniques, traditional products, which include short-term, long-term, and revolving loans, continue to be the mainstay of commercial banking. Short-Term Loans Short-term loans, those with maturities of one year or less, comprise more than half of all commercial bank loans made. Seasonal lines of credit and special purpose loans are the most common short-term credit facilities. Their primary use is to finance...
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...Name Customer Inserts Grade Course Customer Inserts Tutor’s Name Writer Inserts Date Here (Day, Month, Year) Reject inference applied to large data sets Introduction One of the most common use of reject inference technique is negotiation and application scoring. When prospective customers approaches a bank for a loan, it is important to evaluate their credit worthiness or rather if they are likely to default on the loan. Therefore, appropriate models are usually applied, which are pegged upon the bank’s previous performance, and on discovering the fundamental characteristics that could be useful in establishing the prospects of new customers. Apparently,...
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...The sub-prime crisis has led to a financial crisis in 2008 to 2009 that impacted many countries around the world. Discuss the causes of the sub-prime crisis and the major parties responsible. As defined by investopedia, sub-prime is “a classification of borrowers with a tarnished or limited credit history. Lenders will use a credit scoring system to determine which loans a borrower may qualify for. Subprime loans carry more credit risk, and as such, will carry year of 2008 and 2009. The market instability was contributed by many factors, which hurt individuals, businesses, and financial institutions hard. Many financial institutions were left holding mortgage backed assets that had dropped greatly in value. The crisis was a result of too much higher interest rates as well.” The subprime crisis was a nationwide banking emergency that caused recession due to the borrowers being approved for loans that they could not afford – resulting in a large amount of default and foreclosures. The loans were largely based on the assumption that the value of home prices would continue to increase. There are a number of theories as to what led to the sub-prime crisis. It is believed it to have been caused through several factors. The crisis began with the bursting of the U.S. housing “bubble” that occurred in 2001. A housing bubble is defined as a temporary condition caused by unjustified speculation in the housing market that leads to a rapid increase in real estate prices. In the wake...
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...Once recorded, it secures an interest in, or lien against, the property. In title theory states, a mortgage is used and it conveys ownership to the lender. A clause in the mortgage provides that title reverts back to the borrower when the loan is paid. In lien theory states, the mortgage creates a lien only on the property and the title remains with the borrower. The lien is removed when all the payments have been made. With a Deed of Trust there are three parties involved; the Trustor (borrower), the Beneficiary (lender or note holder), and the Trustee (third party holding title to the property, normally a title company or attorney). With a mortgage document, there are only two parties involved, the borrower and the lender. With a Deed of Trust, the borrower conveys title to a trustee who will hold title to the property for the benefit of the lender. The title remains in trust until the loan is paid. Certain language is vital in a security instrument. When reviewing, look for the following terms: Due on Sale Clause: This clause allows the (note holder, lender, etc.) to demand immediate payment of the note if the property is sold without their written consent. The purpose of the due on sale clause is to prevent an assumption of the debt by a higher-risk borrower on the note. Most investors will insist upon this clause being in the security instrument. Charges; Liens: This section requires the borrower to pay all taxes, assessments, charges, fines, and...
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...ARTICLE IN PRESS Journal of Accounting and Economics 45 (2008) 27–54 www.elsevier.com/locate/jae The contracting benefits of accounting conservatism to lenders and borrowers$ Jieying Zhangà Leventhal School of Accounting, University of Southern California, Los Angeles, CA 90089, USA Received 1 March 2004; received in revised form 17 May 2007; accepted 8 June 2007 Available online 19 July 2007 Abstract This paper examines the ex post and ex ante benefits of accounting conservatism to lenders and borrowers in the debt contracting process. I expect conservatism to benefit lenders ex post through the timely signaling of default risk, as manifested by accelerated covenant violations, and to benefit borrowers ex ante through lower initial interest rates. Consistent with these predictions, I find that more conservative borrowers are more likely to violate debt covenants following a negative price shock, and that lenders offer lower interest rates to more conservative borrowers. r 2007 Elsevier B.V. All rights reserved. JEL classification: M41; G32 Keywords: Conservatism; Debt contracting; Covenant violation; Spread 1. Introduction While positive accounting theory suggests that accounting conservatism enhances efficiency in the debt contracting process (Watts and Zimmerman, 1986; Watts, 2003a, b), there is little empirical evidence on the debt contracting benefits of conservatism. In this paper, I provide evidence on the ex post and ex ante benefits of conservatism to lenders and...
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...1. Introduction Lisa and Tom Hanlon were interested in buying a “Devonshire” single family home in the Grosvenor Park subdivision in Bethesda, Maryland. However, they were not sure what they should do. After reviewing a variety of options available for them, I recommend that they buy the Devonshire style house with an 80%, 30 year adjustable rate mortgage, with an interest rate of 8.5% for the first three years. 2. Investors profile Both Lisa and Tom were working and their combined annual income was approximately $150,000 per year. They had debts of $55,000 which required annual payments of $8,700. They had cash amounting to $65,000, and securities worth $29,400. Although their parents had offered to help them with the down payment, they wanted to become financially independent. Finally, they both wanted to have children but that decision seemed far off. 3. Likely investment properties Their dwelling place was a new luxury high rise rental complex apartment. They had signed a twelve-month lease, and the monthly rental rate was $1,500 per month. Although the complex was convenient in terms of location and proximity to amenities, Lisa was dissatisfied with being a tenant unable to build up equity toward home ownership. The Clarendon at Fairhill was a well designed and well built townhouse. The property was somewhat small and old, but it has an affordable price. However, it was located almost five miles from the metro station that Lisa took to work each day. The house at...
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...Solution to Toy World, Inc. Case 32A Toy World, Inc. Cash Budgeting Copyright ( 1996 by the Dryden Press. All rights reserved. CASE INFORMATION PURPOSE This case analyzes a straightforward cash budgeting problem. It is designed to illustrate the mechanics of a cash budget and the way cash budgets are used. Discussion questions focus on the rationale behind the use of cash budgets as well as on their inherent problems. The case also raises the issues of the target cash balance, the optimal size of the credit line, the investment of excess cash, and production scheduling for a seasonal business. TIME REQUIRED Without using the model, 3-4 hours of student preparation should be adequate for most students, with possibly another hour or so to write up the case if it must be handed in. Use of the spreadsheet model can greatly reduce preparation time, especially if the completed model or the easy macro version is given to students. COMPLEXITY A relatively simple, but with a fair amount of number crunching for students not using the spreadsheet model. However, a number of related issues can be discussed, so students can put in a significant amount of time on the case. Still, they can get the gist of it without too much trouble. WAYS WE HAVE USED THE CASE We have used this case in two very different ways. First, with both introductory and not very-well-prepared second course students, we ask them to read the case and to become generally...
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...Solution to Toy World, Inc. Case 32A Toy World, Inc. Cash Budgeting Copyright ( 1996 by the Dryden Press. All rights reserved. CASE INFORMATION PURPOSE This case analyzes a straightforward cash budgeting problem. It is designed to illustrate the mechanics of a cash budget and the way cash budgets are used. Discussion questions focus on the rationale behind the use of cash budgets as well as on their inherent problems. The case also raises the issues of the target cash balance, the optimal size of the credit line, the investment of excess cash, and production scheduling for a seasonal business. TIME REQUIRED Without using the model, 3-4 hours of student preparation should be adequate for most students, with possibly another hour or so to write up the case if it must be handed in. Use of the spreadsheet model can greatly reduce preparation time, especially if the completed model or the easy macro version is given to students. COMPLEXITY A relatively simple, but with a fair amount of number crunching for students not using the spreadsheet model. However, a number of related issues can be discussed, so students can put in a significant amount of time on the case. Still, they can get the gist of it without too much trouble. WAYS WE HAVE USED THE CASE We have used this case in two very different ways. First, with both introductory and not very-well-prepared second course students, we ask them to read the case and to become generally...
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...of Mehta’s forecast, how much debt will Kota need to arrange for the coming year? Will Kota be able to repay the line of credit this year? 3. Why do Kota’s financial requirements vary across the year? What are the key determinants of Kota’s borrowing needs? Please exercise the spreadsheet model to identify the critical forecast assumptions. 4. Consider the four memos that Pundir received. Use your intuition to assess the desirability of two of the proposals: Pondicherry’s request for credit: What will be the effect of this proposal on accounts receivable and debt balances across the year? The level-production proposal: If Kota undertakes level production now, at the low point of the annual business cycle, what is the likelihood of inventory stock-outs at the peak of the business cycle? If Kota undertakes level production just after the peak, what will happen to inventory and debt balances at the cyclical low? Are these proposals liable to relieve, or worsen, Kota’s ability to “clean up” its bank loan by the end of 2001? What action should Pundir take on these two proposals? 5. Why does the bank require 1 30-day “clean-up” of the loan? Should the bank continue to waive compliance with this covenant? 6. Please identify the three most important actions or policies...
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