1. Main determinants of this Financial Fiasco ?

There are different causes of this financial crises. The main cause of the credit crunch
was the default rate. Most of the customers defaulted and were not able to pay the
installments. Investment Bankers have to sell the houses of the default customers so due
to increase in supply the prices of the houses fell and the investment bankers have to bare
the loss. The rating agencies rated bonds and tranches in the same way. Tranches should
not be treated in the same way as bonds and they had inaccurate information about the
quality of the underlying asset.

2. The role of Rating Agency, Government and Regulations in this whole scenario ?
Rating agencies played a key role in the securitization of mortgages. Another role of
rating agencies was to rate the products offered by using different models.
The role of financial institution and their regulators was to avoid similar crises in the
future. It suggests that companies should be required to retain some of the risk in each
instrument that it created when credit risk is transferred. The compensation plan within
the financial institutions should be changed so that they have a longer term focus. The
most important thing that regulators can do is insist that all transactions, regardless of the
credit ratings of the two sides to the transactions, are collateralized.
3. What went wrong and how ?
Inappropriate incentives led to a short term focus in the decision making of traders and a
failure to evaluate the risk being taken. The products that were created lacked
transparency with the payoffs from one product depending on the performance of many
other products. Market participants relied on the AAA ratings assigned to the products
without evaluating the model used by rating agencies.
4. How such anomalies could be avoided in future ?

5. Discuss the various flavors of risk discussed inherently in this case ?

Various flavors of risk that are involved are Operational Risk, Market Risk, Credit Risk
and Liquidity Risk.
6. Discuss the short comings in the given model ?
7. Determine the functions of various Tranches ?