The Amazing Competition

Principal Agent Problems inside the Financial Crisis of 2007-2009

BMI Master Thesis

November 2009

Jasper Holke Klein

Boss: Rob vehicle der Mei


Teachers of Savoir

Business Math concepts and Informatics

De Boelelaan 1081a

1081 HV Amsterdam


This kind of paper is one of the last mandatory elements of this software Business Math concepts and Informatics at the ASSISTE A University Amsterdam. The objective of this subject is always to demonstrate the student's ability to describe problems in a crystal clear manner for the benefit of a professional manager. This really is accomplished by carrying out a literature study and to apply this study to a sensible situation. I have always had a strong desire for strategic considering. One of the ways that the is patterned in the technological theory can be through video game theory. From your broad range of subjects that exist in video game theory Choice to focus on data asymmetry and, more specifically, around the principal-agent relationship as this kind of theory is very widely appropriate and provides a strong informative power. In this way I was able to combine my own interest in tactical thinking as well as the financial sector and able to give a obvious explanation intended for the events that happened in the financial crisis of 2007 -- 2009. Finally, I would like to thank my own supervisor Take advantage of van jeder Mei for his comments and ideas.


November 2009,

Barioler Holke Klein


This paper examines the origin from the financial crisis by a game theoretic perspective. We use the principal-agent theory as being a basis for our analysis. Principal-agent theory is generally applicable in case of where multiple parties strive to maximize their utility and which have uneven information. The financial crisis started after the chest area of the ALL OF US housing bubble, which came from as a result of irresponsible profit maximization by functions in the mortgage loan lending chain. Those get-togethers couldn't end up being held responsible for their activities as they were able hide details from their counterparties and federal government. After the breast of the housing bubble, the losses from the sub-prime home loans greatly damaged the economic climate. No one may determine the financial steadiness of their counterparties anymore, which in turn let to a complete quit on credit rating lending between your financial institutions. Various institutions had a high influence and a higher funding with short term debts, which received them in to liquidity issues and even bankruptcies.

We found the following principal-agent relationships within the financial crisis: 1 . Mortgage borrower and lender (two-sided problem)

2 . Mortgage lender and investment bank

3. Investment bank managers and stockholders

4. Purchase bank and government

5. Investment financial institution, rating organizations and investors

6. Expense bank and financial institutions

7. Financial institutions and creditors

almost 8. Financial institutions and customers / investors


Most of the principal-agent problems in the financial crisis require government rules to be solved. The alternatives aim at guarding the economical illiterate, producing all parties in charge of their activities and offering transparency inside the financial marketplaces.

The following actions should be taken by the US government to resolve the principal-agent problems: • Standardize mortgage contracts and borrower information and add a suitability requirement on loans to protect the financial illiterate mortgage credit seekers. • Remove non-recourse mortgage loans, which will make debtors accountable for the quality of their homes, removes default opportunities and forces those to pay more attention to the monetary aspect of the mortgage. • Require mortgage lenders to hold on to a part of each mortgage loan, which makes it unprofitable for them to give irresponsible mortgage loans. • Control the leverage ratio and economic capital of expense banks. This will make the expenditure banks less...

Bibliography: [1] Ashcraft, Schuermann (2008): Understanding the Securitization of Subprime Home loan Credit (Federal Reserve Bank of New York)

[2] Blackburn, R

[3] Blundell, Meters. (2009): Principal Agent Trouble

[4] Brandenburger, A

[5] Chiappori, S. -A. (2000): Econometric Models of Insurance beneath Asymmetric Details

[6] Dixit, Nalebuff (1991): Thinking logically (ISBN: 0-393-31035-3)

[7] Haldane, A. G. (2009): How come banks failed the stress check (Bank of England)

[8] Hull, J

[9] International Energy Organization (2007): Mind the Space

[10] Laffont, Martimort (2002): The theory of Incentives (ISBN: 0-691-09183-8)

[11] Myerson, Ur. B. (1991): Game Theory: Analysis of conflict (ISBN: 0-674-34116-3)

[12] Stanford Encyclopedia of beliefs (Stanford University or college, Stanford USA)

[13] Watson, J. (2002): Strategy, An Introduction to Game Theory (ISBN: 0-393-97648-3)

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