Solution Manual for Principles of Corporate Finance 14th Edition by Richard B...
Uppres
1. DEEP FINANCE the role played by financial markets in the current crisis and its resolution Enrico S. Cruz 19 March 2009 The views expressed in this summary reflect the perusal views of the undersigned. Opinions as stated are unsubstantiated by detailed empirical study.
2. Enrico S. Cruz – 19 March 2009 page “ Values have shrunken to fantastic levels; […] government of all kinds is faced by serious curtailment of income; […] the withered leaves of industrial enterprise lie on every side; […] the savings of many years in thousands of families are gone. More important, a host of unemployed citizens face the grim problem of existence and an equally great number toil with little return.” - Excerpts from Franklin D. Roosevelt’s inaugural speech in 1933
3.
4.
5.
6. Enrico S. Cruz – 19 March 2009 page The Traditional Mortgage Model Qualified Borrower Bank Depositors USD Title USD Certificates of Deposit USD PN / Title Developer Probable Causes: Mortgage Crisis
7. Enrico S. Cruz – 19 March 2009 page The New Mortgage Model Qualified Borrower Bank Depositors USD Title USD Certificates of Deposit SPV / CDO Investors Assets USD USD USD PN / Title USD PN / Title Wall Street Developer Probable Causes: Mortgage Crisis Subprime
8.
9. Enrico S. Cruz – 19 March 2009 page Probable Causes: Credit Crisis Prepared by: Jeffrey Frankel, James W. Harpel Professor of Capital Information and Growth at Harvard Kennedy School Housing crash Financial crisis 2007 -08 Recession 2008 -09 Eventual loss of US Global hegemony Stock market crash Oil Price Spike 2007-08 Failures of Corporate governance Underestimated risk in financial markets Excessive leverage in Financial institutions Stock market bubble
13. Enrico S. Cruz – 19 March 2009 page Products in the News: Minibond Singapore (19 September 2008) - “Should Minibond Series 3 have taken the retail route?” Up to $200Mio of these notes were sold to a gullible retail public who probably thought they were buying five year bond issued by 6 leading banks that paid a 5% coupon per year but where in reality, not only exposed to the US housing market but also to complex credit default swap arrangement where substantiative party was the now bankrupt Lehman Brothers”
14. Enrico S. Cruz – 19 March 2009 page Products in the News: Minibond The Probable Structure: First to default (FTD) Note Linked to 6 Banks Retail Investors USD Minibond Ltd (LB SPV) Market 5% USD Note Libor + Premium Sell protection on 6 Banks (FTD) USD (collateral) Bonds/CDO USD
15.
16.
17. Enrico S. Cruz – 19 March 2009 page Products in the News: Commodity Hedges Fuel Hedge 12 March 2009 “ Cathay Pacific Posts $1.1 billion Loss for ‘08” “ Common hedging methods lock in fuel prices, protecting airlines when prices rise . But when prices fall, the difference is often accounted for as a loss” “ Australia’s Quantas Airways Ltd. used a relatively expensive hedging technique that involved options , Chief Executive Alan Joyce has said. But Quantas could walk away from its options as fuel prices dropped, unlike the less expensive hedges, which lock in prices. It now largely benefits from falling prices , he said.”
18.
19. Enrico S. Cruz – 19 March 2009 page What to Expect Greenspan (AWJ) Opinions 12 March 2009 “ It is now very clear that the level of complexity to which market practitioners at the height of their euphoria tend to push risk management techniques and products were too much for even the most sophisticated market players to handle properly and prudently.” “ Adequate capital and collateral requirements.” “ A regulatory regime that will ensure responsible risk management on the part of financial institutions ,while encouraging them to continue taking the risks…” Bernanke FT 10 March 2009 “ Overhaul of financial structure infrastructure and new reforms would require global consideration.” “ Creation of an authority that would monitor systemic risks”
20. Enrico S. Cruz – 19 March 2009 page What to Expect Buffett 2008 Letter to Shareholders “ Derivatives are dangerous. They have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks.” “ They allowed Fannie Mae and Freddie Mac to engage in massive misstatements of earnings for years” “ Though historical volatility is a useful ---but far from foolproof ---concept in valuing short-term options, its utility diminishes rapidly as the duration of the option lengthens. In my opinion, the valuations that the Black Scholes formula now placed on our long term put options overstate our liability, though the overstatement will diminish as the contracts approach maturity.”
21.
22.
23. Enrico S. Cruz – 19 March 2009 page What to Expect The role of the academe?
![Enrico S. Cruz – 19 March 2009 page “ Values have shrunken to fantastic levels; […] government of all kinds is faced by serious curtailment of income; […] the withered leaves of industrial enterprise lie on every side; […] the savings of many years in thousands of families are gone. More important, a host of unemployed citizens face the grim problem of existence and an equally great number toil with little return.” - Excerpts from Franklin D. Roosevelt’s inaugural speech in 1933](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)