Werkstuk-Klein Tcm39-124139 Essay

15318 Words Apr 14th, 2014 62 Pages
Principal Agent Problems in the Financial Crisis of 2007-2009

BMI Master Thesis

November 2009

Jasper Holke Klein
Supervisor: Rob van der Mei


Faculty of Sciences Business Mathematics and Informatics De Boelelaan 1081a 1081 HV Amsterdam

This paper is one of the last compulsory elements of the program Business Mathematics and Informatics at the VU University Amsterdam. The objective of this subject is to demonstrate the student's ability to describe a problem in a clear manner for the benefit of an expert manager. This is accomplished by doing a literature research and to apply this research to a practical situation.
I have always had a strong interest in
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After the bust of the housing bubble, the losses of the sub-prime mortgages greatly affected the financial system. No one could determine the financial stability of their counterparties anymore, which let to a complete stop on credit lending between the financial institutions. Many institutions had a high leverage and a high funding with short term debt, which got them into liquidity troubles and even bankruptcies.

We found the following principal-agent relationships present in the financial crisis: 1. Mortgage borrower and lender (two-sided problem) 2. Mortgage lender and investment bank 3. Investment bank managers and stockholders 4. Investment bank and government 5. Investment bank, rating agencies and investors 6. Investment bank and financial institutions 7. Financial institutions and creditors 8. Financial institutions and customers / investors

Most of the principal-agent problems in the financial crisis require government regulations to be solved. The solutions aim at protecting the financial illiterate, making all parties accountable for their actions and providing transparency in the financial markets.

The following actions should be taken by the US government to solve the principal-agent problems: • Standardize mortgage contracts and borrower information and add a suitability requirement on mortgages to protect the

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