INTRODUCTION TO FINANCE AND FINANCIAL MARKETS

API 141 Finance SYLLABUS July 27, 2017

Akash Deep

API 141 Finance Syllabus Akash Deep July 27, 2017

HARVARD Kennedy School API-141, Fall 2017 Finance Faculty Office Telephone Email Office Hours

Akash Deep Littauer-213 617 495 1340 [email protected] Tuesday and/or Thursday afternoons (sign-up outside Littauer-213)

Lectures Review Session

Tuesday and Thursday, 1:15pm to 2:30pm in Littauer-140 Friday, 1:15pm to 2:30pm in Belfer-400 (Land), starting Friday, Sept 8

Faculty Assistant Office Telephone Email

Jessica De Simone Rubenstein 131A 617 495 1415 [email protected]

Teaching Fellow Email

Caitlin Trethewy [email protected]

COURSE DESCRIPTION This introductory (but fast-paced) course provides a general survey of finance and investments. It emphasizes an intuitive, logically rigorous understanding of the theory and practice of financial markets, illustrating the concepts through examples and cases drawn from the public, private, and non-profit sectors. Topics covered include: present value analysis and discounting, diversification, the tradeoff between risk and return, market efficiency, pricing of stocks and bonds, the capital asset pricing model, term structure of interest rates, the principle of arbitrage, pricing of derivative securities (forwards, futures, and options), the use of derivatives for hedging, risk management, and the regulation of financial markets. AUDIENCE The course is intended for students who are interested in learning the basic tools and techniques of finance and how they are employed for the valuation of complex securities. While an intuitive appreciation of the principles will be the primary objective, mathematical tools will be employed to illustrate the implementation of these principles to practical cases. Any advanced mathematics that is used will be developed in lectures and review sessions. PREREQUISITE It is assumed that students will be familiar with introductory concepts in economics (e.g. API 101) and basic (high school level) mathematics. Students with concerns about their backgrounds are welcome to speak to the instructor. Basic computer spreadsheet skills will be expected, and required to complete some of the assignments.

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REQUIREMENTS The course must be taken for credit. No auditors please. Attendance: An alert, inquisitive presence in each and every class is mandatory. Attendance in review sessions is strongly advised but not required. Readings: Students will be expected to have completed the assigned readings before class and review them after class. Note that there are required readings for the first day of class. Assignments: Weekly problem sets will be assigned throughout the course to illustrate and reinforce the concepts presented in class as well as in preparation of the case discussions to follow. Exam: There will be in-class, closed book and closed notes midterm and final exams. No makeup exams will be held. Grading:

Class Participation

10%

Written assignments 20% Midterm Exam

30%

Final Exam

40%

MATERIALS The textbook for the course, Essentials of Investments, 10th edition by Zvi Bodie, Alex Kane and Alan Marcus, McGraw-Hill Irwin, 2017. The textbook can be purchased in hard copy or digitally through McGraw-Hill Connect. Limited copies of the textbook are available on Reserve at the HKS Library. Readings and cases are available online on the Canvas site for this course. Non-Harvard students should request a Harvard XID, following instructions on courses.harvard.edu. Regular reading of financial news in publications such as The Wall Street Journal, The Financial Times or the Business pages of The New York Times is strongly recommended. OTHER RECOMMENDED (BUT NOT REQUIRED) FINANCE TEXTS The following are some good introductory finance texts that overlap in parts with the material covered in the recommended text for this class: Corporate Finance, 10th edition, Stephen Ross, Jeffrey Jaffe, and Randolph Westerfield, McGraw-Hill Financial, 2013. Principles of Corporate Finance, 11th edition, Richard Brealey and Stewart Myers, McGraw-Hill Financial, 2014. Investment Science, 2nd edition, David Luenberger, Oxford University Press, 2013 (uses calculus). Financial Modeling, 4th edition, Simon Benninga, The MIT Press, 2014.

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TOPICS AT A GLANCE

No

1

Date Aug 31 (Th)

Topic

Assignment due

Introduction to finance and financial markets

Sep 5 (T) Sep 7 (Th) Sep 12 (T) Sep 14 (Th)

Time Arbitrage and the Time value of money Valuing financial securities: Bonds Case: Tombstones Valuing financial securities: Equity

6 7 8 9 10

Sep 19 (T) Sep 21 (Th) Sep 26 (T) Sep 28 (Th) Oct 3 (T)

Uncertainty Diversification, risk, and return measures Choosing a portfolio Case: The State of South Carolina The Capital Asset Pricing Model Case: Communications Satellite Corporation

11

Oct 5 (Th)

Information Efficient markets

12

Oct 10 (T)

Midterm Exam

13

Oct 12 (Th)

Case: Long Term Capital Management

15 16 17 18 19 20 21

Oct 17 (T) Oct 19 (Th) Oct 24 (T) Oct 26 (Th) Oct 31 (T) Nov 2 (Th) Nov 7 (T)

Risk Management Introduction to risk management Forward and futures contracts Case: Dozier Industries Options Pricing of options Guest speaker Case: BASIX

G

22 23

Nov 9 (Th) Nov 14 (T)

Real Options Real options Case: Bidding for Antamina

H

23 24 25

Nov 16 (Th) Nov 21 (T) Nov 23 (Th) Nov 28 (T)

Financial Institutions Case: Federal Deposit Insurance Corporation Case: Subprime Meltdown No class Financial institutions and policy

26

Nov 30 (Th)

Review

Dec 6

Final exam (3 to 6pm)

2 3 4 5

A

B C D

E F

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INTRODUCTION TO FINANCE AND FINANCIAL MARKETS Required Readings Introduction to finance and financial markets “The New Capitalism: How unfettered finance is fast reshaping the global economy”, Martin Wolf, The Financial Times, June 19, 2007. “Introduction: Finance, Stewardship, and Our Goals”, in Finance and the Good Society, Robert J. Shiller, Princeton University Press, 2012, 1-15. “The slumps that shaped modern finance”, The Economist, April 12, 2014. Chapters 1 and 2, Essentials of Investments, 10th edition, Bodie, Kane & Marcus, 2017. (Optional reading: Chapters 3 and 4) Further Reading Finance and the Good Society, Robert J. Shiller, Princeton University Press, 2012. The Wall Street Journal Guide to Understanding Money & Investing, Kenneth M. Morris and Virginia B. Morris, Simon and Schuster, 2004.

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TIME: TIME VALUE OF MONEY The three pillars of finance are time, uncertainty and information. This section focuses on the first of these pillars – time – to examine how the occurrence of cash flows at different points in time affects their value. The resultant concept of present value (and future value) is then used to value general investment opportunities and securities, and in particular bonds and stocks. Required Readings Arbitrage and the Time value of money “Arbitrage and Financial Decision Making”, Chapter 3 in Corporate Finance, 3rd edition, Jonathan Berk and Peter DeMarzo, Pearson Addison Wesley, 2014. “The Time Value of Money”, Chapter 4 in Corporate Finance, 3rd edition, Jonathan Berk and Peter DeMarzo, Pearson Addison Wesley, 2014. Valuing financial securities: Bonds Chapter 10, Essentials of Investments, 10th edition, Bodie, Kane & Marcus, 2017. Case: Tombstones HBS case # 9-211-063 How did six firms – Microsoft, Coca Cola Enterprises, Norfolk Southern, IBM, Ford Motor, and Cephalon – raise money in US capital markets just after the financial crisis and recession of 2008-09? Valuing financial securities: Equity Chapter 13 and Section 14.1, Essentials of Investments, 10th edition, Bodie, Kane & Marcus, 2017. Further Reading Damodaran on Valuation: Security Analysis for Investment and Corporate Finance, 2nd edition, Aswath Damodaran, John Wiley & Sons, 2006. The Handbook of Fixed Income Securities, 8th edition, Frank J. Fabozzi, McGraw-Hill Professional, 2012. Fixed Income Securities: Tools for Today's Markets, 2nd edition, Bruce Tuckman, John Wiley & Sons, 2002. Security Analysis, 6th edition, Benjamin Graham and David Dodd, McGraw-Hill Education, 2008.

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UNCERTAINTY: PORTFOLIO SELECTION The future embodies risk and this section explores the ramifications of uncertainty in the cash flows from securities on investors who, by nature, are risk averse. The risk embedded in securities is measured by viewing them as part of a diversified portfolio. The result is not only a theory about the relationship between risk and return but also a surprisingly simple portfolio investment strategy. These concepts are used to ask the question: should the state of South Carolina invest its public employees’ pension savings in stocks? Required Readings Diversification, risk, and return measures Chapter 5, Essentials of Investments, 10th edition, Bodie, Kane & Marcus, 2017. “Risk, Market Sensitivity, and Diversification”, William F. Sharpe, Financial Analysts Journal, JanuaryFebruary, 1995, 84-88. Choosing a portfolio Chapter 6, Essentials of Investments, 10th edition, Bodie, Kane & Marcus, 2017. “You, too, Can Short Stocks”, Business Week, March 22, 1999. “Long & Short: It’s a Tough Job, So Why Do They Do It? The Backward Business of Short Selling”, Jesse Eisinger, The Wall Street Journal, March 1, 2006. Case: The State of South Carolina HBS case # 9-201-061 South Carolina, State Treasurer's Office, 1998. Until last year the state pension fund, with over $17 billion in assets, was barred by the state constitution from investing in equities. After the constitution was amended, the state government has to decide how much to invest in equities, and what assets to choose. “The Long, Sorry Tale of Pension Promises”, Roger Lowenstein, The Wall Street Journal, October 1, 2013. Study Questions: 1. What is the problem that South Carolina faced in 1999 with regard to the management of its pension funds? How do you know that there is a problem? 2. What are the potential solutions? 3. What should the objectives of pension investing be? 4. How do stocks versus bonds rank on these dimensions? Further Reading Modern Portfolio Theory and Investment Analysis, 9th edition, Edwin Elton, Martin Gruber, Stephen Brown and William Goetzmann, John Wiley & Sons, 2014. Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, 5th edition, Jeremy J. Siegel, McGraw-Hill Education, 2014.

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UNCERTAINTY: THE CAPITAL ASSET PRICING MODEL The Capital Asset Pricing Model is the most widely used model in finance. It provides a simple relationship between risk and return that is useful in addressing a range of different problems in finance such as portfolio selection, valuation of projects and securities, and performance appraisal. The Communications Satellite Corporation case uses this model to ascertain the rate of return that this regulated monopoly, which was set up to launch the first communication satellites, should be allowed to earn. Required Readings The Capital Asset Pricing Model Sections 7.1-7.3, Essentials of Investments, 10th edition, Bodie, Kane & Marcus, 2017. “Risk and Return” The Economist, February 2nd 1991, 72-73. “Does the Capital Asset Pricing Model Work?”, David Mullins, Jr., Harvard Business Review, JanuaryFebruary, 1982, 105-113. Case: Communications Satellite Corporation HBS Case No. 276-195 In January 1975, the Federal Communications Commission (FCC) concluded an 11-year investigation of the appropriate regulation of Comsat. One of the most important of these was the determination of the fair rate of return on Comsat's capital. Both the qualitative assessment of risk and the use of analytical techniques had been suggested by eminent experts. Study Questions: 1. How risky is the investment in Comsat compared to an investment in AT&T and other companies? Which of these risks can be classified as systematic and which as unsystematic? 2. By what methods can the cost of equity and cost of capital be estimated for Comsat (or any other company)? 3. How convincing is the argument of the trial staff? What are the implications of its reasoning and recommendation for all parties concerned and for future government regulated companies such as Comsat? 4. What relation, if any, should there be between a firm’s cost of capital and its investment decisions? Further Reading Asset Pricing, revised edition, John H. Cochrane, Princeton University Press, 2005. The Econometrics of Financial Markets, John Y. Campbell, Andrew W. Lo and A. Craig MacKinlay, Princeton University Press, 1996. Dynamic Asset Pricing Theory, 3rd edition, Darrell Duffie, Princeton University Press, 2001.

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INFORMATION: EFFICIENT MARKETS The third pillar of finance is information. The prices of financial securities also reveal information about underlying factors that need not be only economic but also political and social. How quickly and appropriately prices reflect information is referred to as a measure of efficiency of markets. No topic in finance is more contentious, and none more important. Not surprisingly, the Nobel Prize in Economics for 2013 was awarded to two economists – Eugene Fama and Robert Shiller – who hold seemingly opposite views on the subject. Required Readings Efficient markets Chapter 8, Essentials of Investments, 10th edition, Bodie, Kane & Marcus, 2017. “Trendspotting in asset markets”, Nobel Prize Committee, 2013. “Random Walks in Stock Market Prices”, Eugene F. Fama, Financial Analysts Journal, JanuaryFebruary, 1995, 75-80. “Efficient Markets, Random Walks, and Bubbles”, Chapter 11 in Irrational Exuberance, 3rd edition, Robert Shiller, Princeton University Press, 2015. “The Efficient Market Hypothesis and its Critics”, Burton G. Malkiel, Journal of Economic Perspectives, Winter 2003 17 (1) 59-82. Case: Long-Term Capital Management “All Bets Are Off: How the Salesmanship And Brainpower Failed At Long-Term Capital” Michael Siconolfi, Anita Raghavan, et. al., The Wall Street Journal, November 16, 1998, p A1. Even with the market tremors of the preceding weeks, no one foresaw the earthquake about to rock Greenwich, Conn., one summer morning…LTCM's biggest bets were blowing up, and no one could do anything about it. By 11 a.m., the fund had lost $150 million in a wager on the prices of two telecommunications stocks involved in a takeover. Then, a single bet tied to the U.S. bond market lost $100 million. Another $100 million evaporated in a similar trade in Britain. By day's end, LTCM had hemorrhaged half a billion dollars … The carnage that weekend set off events unprecedented in the world of high finance, culminating with a $3.625 billion bailout funded by a consortium of 14 Wall Street banks and engineered by the Federal Reserve. LTCM lost more than 90% of its assets by the time it was bailed out, and the markets were roiled for weeks. Longer term, it forced many of the world's most sophisticated institutional investors to redefine the ways they manage risk…

Study Questions: 1. 2. 3. 4.

Identify some the main investment strategies adopted by LTCM. What was the role of arbitrage in these investment strategies? What was the source of risk in these investment strategies? What does the LTCM experience tell you about market efficiency?

"Death by the Numbers", David Kestenbaum, Science, February 26, 1999, 1244-1247. “Hedge Fund Existential” Richard Bookstaber, Financial Analysts Journal, September/October 2003, pp 19-23.

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Further Reading Manias, Panics & Crashes: A History of Financial Crises, 4th edition, Charles P. Kindleberger, John Wiley & Sons, 2000. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, 2nd edition, Nassim Nicholas Taleb, Texere, 2004. Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay, 1841. Inefficient Markets: An Introduction to Behavioral Finance, Andrei Shleifer, Oxford University Press, Clarendon Lectures in Economics, 2000. Irrational Exuberance, 3rd edition, Robert Shiller, Princeton University Press, 2015. A Random Walk Down Wall Street, revised edition, Burton G. Malkiel, W. W. Norton & Co., 2015. Thinking, Fast and Slow, Daniel Kahneman, Farrar, Straus and Giroux, 2011. When Genius Failed: The Rise and Fall of Long-Term Capital Management, Roger Lowenstein, Random House Publishing Group, 2001.

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RISK MANAGEMENT: INTRODUCTION If it is risk that begets return, then managing risk is what finance is all about. Risk Management seeks not only to provide tools for how to reduce (or take on) risk but also provides guidance of when risk management might add value. Derivatives help make the job of the risk manager, and the speculator, easier! Required Readings Introduction to Risk Management “A Framework for Risk Management”, Kenneth Froot, David Scharfstein, and Jeremy Stein, Harvard Business Review, November-December 1994, 91 - 102. “The Fantastic System of Side Bets”, in Against the Gods: The Remarkable Story of Risk, Peter Bernstein, 1996, 304-328. “Financial WMD?”, The Economist, January 22, 2004. Further Reading Against the Gods: The Remarkable Story of Risk, Peter Bernstein, John Wiley & Sons, 1998. The Essentials of Risk Management, Michel Crouhy; Dan Galai, Robert Mark, McGraw-Hill Professional, 2006. Risk Management and Derivatives, René M. Stulz, Thomson South-Western, 2003.

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RISK MANAGEMENT: FORWARD AND FUTURES CONTRACTS Forward contracts simply lock in the price for transactions in the future. This simple innovation that gets rid of price uncertainty thus becomes the most obvious and powerful tool for hedging risk. But how much should you pay for this innovation? The Dozier case examines this question in the context of currency markets, the largest financial market by notional volume. Required Readings Forward and Futures Contracts Sections 17.1-17.4, Essentials of Investments, 10th edition, Bodie, Kane & Marcus, 2017. “Should We Fear Derivatives?”, René Stulz, Journal of Economic Perspectives, Summer 2004 18 (3), 173-192. Case: Dozier Industries "Dozier Industries" in G. Feiger and B. Jacquillat, International Finance, Allyn and Bacon, 1982. A US company has just secured its first international sales contract in the UK. But the CFO of the company is concerned that if the value of the pound sterling depreciated, the viability of the project could be impaired. Study Questions: 1. What risk/s does Dozier face? 2. What other financial instruments or derivatives could Dozier have used to hedge its risk exposure? What would the benefits and costs be? 3. What changes would you recommend for Dozier with regard to the manner in which it bids for international contracts? Further Reading Options, Futures, and Other Derivatives, 9th edition, John C. Hull, Prentice Hall, 2015. Futures, Options, and Swaps, Robert W. Kolb and James A. Overdahl, Wiley-Blackwell, 2007.

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RISK MANAGEMENT: OPTIONS Financial option contracts constitute some of the most advanced derivative products traded in financial markets today. At the same time they resemble insurance contracts that are some of the earliest financial contracts recorded in history. The celebrated Black-Scholes option pricing is simply an application of the principle of arbitrage pricing but it represents a breakthrough in financial engineering and risk management that has remained unmatched by any other development in the theory of finance. Yet this so called “rocket science” can be deployed to effectively address the age old and widely pervasive policy challenge of insuring crops against the vagaries of weather as illustrated in the BASIX case. Required Readings Options Chapter 15, Essentials of Investments, 10th edition, Bodie, Kane & Marcus, 2017. “Of Butterflies and Condors”, The Economist, February 16, 1991, 58-59. Case: BASIX HBS Case # 207-099 BASIX, an Indian microfinance corporation, must decide whether to continue to sell weather insurance to its clients. A brand-new financial product, weather insurance pays if measured rainfall during the growing season falls below a pre-specified limit. Mr. Sattaiah, managing director of the BASIX's bank, considers a revised insurance policy for the coming season, weighing the costs and potential risks of expanding the product against the potential benefits. Study Questions: 1. What fundamental risks do BASIX customers face? How exposed are they to weather risk? 2. How well did BASIX’s earlier efforts to offer rainfall insurance fare? Why? 3. As a BASIX Customer Service Agent, how would you explain and sell the proposed policy to farmers? 4. A simulation based on the rainfall distributions shown in Exhibit 6 of the case suggests that a Rs. 125 policy would have an expected payout of Rs. 83. Is the proposed price appropriate? 5. Is this a product that BASIX should be selling to farmers? If not, how might you modify it to make it better serve farmers’ needs? Pricing of Options Chapter 16, Essentials of Investments, 10th edition, Bodie, Kane & Marcus, 2017. “A Calculus of Risk”, Gary Stix, Scientific American, May 1998, 92-97. “So many options”, The Economist, November 7, 2002. Further Reading Options, Futures, and Other Derivatives, 9th edition, John C. Hull, Prentice Hall, 2015. Derivatives: An Introduction, Robert A. Strong, South-Western, 2002.

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REAL OPTIONS Real world opportunities are very similar to financial options because they represent choices that are not necessarily obligations. Furthermore, these choices can be made based upon the availability of new information. Viewing real opportunities as real options allows one not only to exercise these choices more judiciously but also permits the valuation of information itself. In the Antamina case, the Peruvian government devises a novel risk-sharing mechanism to privatize a mine that also seeks to skew the investment incentives of the developer. Required Readings Real Options “The Options Approach to Investment”, Avinash Dixit and Robert Pindyck, Harvard Business Review, May-June 1995, 105 – 115. Case: Bidding for Antamina HBS Case # 297-054 In June 1996, executives of the multinational mining company RTZ-CRA are contemplating bidding to acquire the Antamina copper and zinc mine in Peru. The Antamina project is being offered for sale by auction as part of the privatization of Peru's state mining company. RTZ-CRA has to determine what the mine is worth, and to recommend whether and how RTZ-CRA should bid in the upcoming auction. The bidding rules put in place by the Peruvian government dictate that each company's bid contain two components: an up-front cash amount and the amount the bidder will invest to develop the property, if development is warranted after further exploration is completed. Study Questions: 1. If the winning bidder was legally forced to develop Antamina after completing the exploration phase, and was required to pay the Peruvian government upfront for this project, how would you determine the price that they would be willing to pay? 2. If the winning bidder could choose whether or not to develop Antamina after completing the exploration phase, but was required to pay the Peruvian government upfront for the right to develop the project, how would you determine the price that they would be willing to pay? 3. What are the incentives brought about by the different auction designs described above, and that chosen by the Peruvian government? Do the rules seem to meet what you perceive to be the goals of the government? Further Reading Real Options and Investment under Uncertainty: Classical Readings and Recent Contributions, edited by Eduardo S. Schwartz and Lenos Trigeorgis, The MIT Press, 2004. Investment under Uncertainty, Avinash Dixit and Robert Pindyck, Princeton University Press, 1994. Real Options: Managerial Flexibility and Strategy in Resource Allocation, Lenos Trigeorgis, The MIT Press, 1996. Real Options in Capital Investment: Models, Strategies, and Applications, edited by Lenos Trigeorgis, Greenwood Publishing Group, 1995.

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FINANCIAL INSTITUTIONS In this final section, we use the tools developed in the course to analyze two of the most significant financial policy challenges of the last century: the Great Depression of the 1930s and the Great Recession of 2008. What did the policy makers do? Where did they succeed? Where did they fail? And what lessons can we learn? Required Readings Case: The U.S. Banking Panic of 1933 and Federal Deposit Insurance Corporation HBS Case # 799-097 ‘On March 3 banking operations in the United States ceased ... the government has been compelled to step in for the protection of depositors and the business of the nation’. As President Franklin D. Roosevelt spoke these words to Congress on March 9, 1933, the nation's troubled banking system lay dormant. More than 9,000 banks had ceased operations between the stock market crash in October 1929 and the banking holiday in March 1933. The economy was in the midst of the worst economic depression in modern history. Out of the ruins, birth was given to the FDIC three months later when the President signed the Banking Act of 1933. Study Questions: 1. What do commercial banks do? Does this mix of activities make economic sense? How does this expose commercial banks to risks? 2. Recall from the BASIX case that any insurance contract can also be viewed as an option. Can this perspective be utilized to understand deposit insurance? 3. What regulatory measures can seek to mitigate the risks of banking? “Banking on the State”, Andrew G Haldane and Piergiorgio Alessandri, based on a presentation delivered at the Federal Reserve Bank of Chicago twelfth annual International Banking Conference on The International Financial Crisis: Have the Rules of Finance Changed?, Chicago, 25 September 2009. Case: Subprime Meltdown: American Housing and Global Financial Turmoil HBS Case # 708-042 “The Federal Reserve and the U.S. Treasury have lately widened the federal safety net more quickly and more aggressively than at any time since the New Deal era. Indeed, a recent frontpage headline in this newspaper, “Confidence Ebbs for Bank Sector and Stocks Fall,” had distinctly Depression overtones. (You could almost envision the next line: “Hoover Urges Calm.”) And not since the Depression (under the Reconstruction Finance Corporation) has the government bought significant equity in private firms, as the Treasury has sought the authority to do in the case of Fannie Mae and Freddie Mac. At least during the 1930s, legislation followed months of deliberation and public hearings. The proffered fixes to today’s fast-moving crises are worked out hastily and in private.” - Roger Lowenstein, The New York Times, July 27 2008 Study Questions: 1. Is residential housing a “safe” asset? 2. What is securitization? How was securitization used by policymakers in the United States to channel housing finance to homebuyers?

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3. What were the major changes in the nature of housing finance markets from the 1990s until the onset of the financial crisis? “Getting Up to Speed on the Financial Crisis: A One-Weekend-Reader’s Guide”, Gary Gorton and Andrew Metrick, Journal of Economic Literature, 2012, 50:1, 128–150. Financial Institutions & Policy To prepare for this final case session, please review the last two cases:  

The U.S. Banking Panic of 1933 and Federal Deposit Insurance Subprime Meltdown: American Housing and Global Financial Turmoil

… and read the concluding chapters (read more if you wish) from two reports on the financial crisis:  

“Conclusions of the Financial Crisis Inquiry Commission”, The Financial Crisis Inquiry Report, page xv to xxviii (14 pages) in the authorized edition, January 2011 Find the full report at http://fcic.law.stanford.edu/report “Conclusion”, The Squam Lake Report: Fixing the Financial System, page 79-87 (9 pages), 2010 Find the full report at http://www.stat.unc.edu/faculty/cji/890-11/SquamLake.pdf

Study Questions 1. Should Roosevelt agree to deposit insurance? Are there alternatives to reforms of the banking system that might be preferable from an economic point of view? 2. How has deposit insurance worked in the United States and around the world over the last seventy years? 3. What regulatory measures have been used to mitigate the risks of banking? 4. In what ways did the structure and risks of Government Sponsored Enterprises – Fannie Mae and Freddie Mac – resemble those of commercial banks? How were they different? 5. Overall would you say that the housing finance system has functioned well or poorly through the last decade? 6. What changes would you recommend to the institutions that shape and regulate the housing finance system? Further Reading The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, Financial Crisis Inquiry Commission, 2011. Balancing the Banks: Global Lessons from the Financial Crisis, Mathias Dewatripont, Jean-Charles Rochet and Jean Tirole, translated by Keith Tribe, Princeton University Press, 2015. The Squam Lake Report: Fixing the Financial System, Kenneth R. French, Martin N. Baily, John Y. Campbell, John H. Cochrane, Douglas W. Diamond, Darrell Duffie, Anil K Kashyap, Frederic S. Mishkin, Raghuram G. Rajan, David S. Scharfstein, Robert J. Shiller, Hyun Song Shin, Matthew J. Slaughter, Jeremy C. Stein and René M. Stulz, Princeton University Press, 2010. Too Big to Fail, Andrew Ross Sorkin, Viking Press, 2009. After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead, Alan S. Blinder, Penguin Press, 2013.

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