Author Question: Why did the principal-agent problem for investment banks become more severe following the repeal of ... (Read 59 times)

nelaaney · **on:** Jun 29, 2018

Why did the principal-agent problem for investment banks become more severe following the repeal of the Glass-Steagall Act in 1999?

What will be an ideal response?

Question 2

In the term real GDP, what does GDP stand for and what does it measure? What does real indicate?

What will be an ideal response?

Jsherida · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Congress repealed the Glass-Steagall Act in 1999, after which some commercial banks began engaging in investment banking. Traditionally, large Wall Street investment banks had been organized as partnerships, but by 2000 they had all converted to being publicly traded corporations. In a partnership, the funds of the relatively small group of owners are put directly at risk, and the principal-agent problem is reduced because there is little separation of ownership from control. With a publicly traded corporation, on the other hand, the principal-agent problem can be severe due to the separation of ownership from control.

Answer to Question 2

GDP stands for gross domestic product and measures the value of the total production of final goods and services. Real indicates that the goods and services produced are valued using the prices of the base year, not the current year, and therefore are adjusted for inflation.