Reference no: EM131099229

Question 1: We are living in the aftermath of the housing market collapse of 2008 that was caused by rising mortgage defaults. Especially the concept of re-sets of low interest ARM's. Your parent's generation used 30 year fixed mortgages to buy houses, but in recent years, financial engineers have created CDO's, CMO's, CLO's and SIV's. These methods of spreading risk have created great liquidity in the mortgage market and with low interest rates, many people who would otherwise not qualify for conventional mortgages have obtained ARM's, interest only, no-doc, you name it. Now, however, banks around the world, who hold many of these engineered debt instruments have been hit by write offs of these instruments and there has been a serious contraction of liquidity as the perception and reality of risk of non-payment is now evident in the massive rate of increase of foreclosures. I want you to do some brief research on this and set forth your view of where "information asymmetry" may have played a role in this "mess". This whole problem is very much like the Savings and Loan "melt down" in the 1980's but on a global scope.

Who benefitted from the run up in mortgages? Why did it go on so long? Where were the "rating" agencies on this? Why did the Federal Reserve cut interest rates to "zero" and start buying treasury bonds?

Question 2: With all the financial models and tools that are available, one might believe that finance and market behaviors are fully determined. This is the "random-walk" theory of market behavior. All events are instantly "priced-in" and the fluctuations are random. Yet, there are legions of individuals who follow trading systems to "beat the market". So what's your view is market trading a hopeless zero-sum game? Are the Random-walker's right? Or is there something more to market behavior.