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Answer: Issuing mortgage-backed securities helps provide financial institutions with liquidity for their mortgage portfolios.
## Explanation **D is correct** because during the S&L crisis, savings and loans institutions learned to manage their exposure to interest rate risk and credit risk from their mortgage portfolios by issuing mortgage-backed securities. These products, first issued in 1969 and backed by government agencies, provided liquidity for S&L mortgage portfolios, though they didn't completely eliminate the problem of borrowing short and lending long. **A is incorrect** because the mortgages at the time were primarily fixed-rate mortgages, not floating-rate. S&Ls were borrowing short-term while lending long-term (30-year fixed rate mortgages), which created interest rate risk when short-term rates rose. **B is incorrect** because maintaining a negative interest rate spread would cause losses for financial institutions. S&Ls were actually trying to earn a positive spread between their lending and borrowing rates. **C is incorrect** because the S&L bailout was funded by taxpayer funds, not by other financial institutions, and the text doesn't discuss whether such bailouts should be avoided in the future.
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A risk manager at a bank is giving a presentation to a group of interns on lessons learned from financial crises. The manager focuses on the case of the savings and loan (S&L) crisis in the US during the 1980's. Which of the following is most appropriate for the risk manager to conclude as a lesson to be learned from this case?
A
Financial institutions face a disadvantage when issuing floating-rate residential mortgages that are funded by short-term liabilities.
B
Maintaining a negative interest rate spread between lending and borrowing rates is a profitable business model for financial institutions.
C
Financial institutions should not be bailed out if the sole funding source for the bailout is other, larger financial institutions.
D
Issuing mortgage-backed securities helps provide financial institutions with liquidity for their mortgage portfolios.
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