Discuss the risks taken by large banks and how the Dodd-Frank legislation restricts them

What will be an ideal response?

Bank holding companies (e.g., Citigroup and Bear Stearns) participated in speculative trades involving mortgage-backed securities and other financial instruments (e.g., derivatives). When these speculative bets went under, the institutions involved could not sell the assets involved, which thus became known as "toxic" assets. The federal government had to spend billions in taxpayer money to bail out these companies. They are presently repaying these loans (at least in part), plus interest and/or preferred shares, to the federal government. The Dodd-Frank legislation was also intended to prevent FDIC-insured institutions from making speculative trades and to require these entities to sell their interests in hedge funds and private equity funds; only 3 percent of their capital could remain invested in such funds. Investment banks also had to set aside reserves to cover losses. Originators of mortgage securities must hold 5 percent of the credit risk, thus retaining an interest in the performance of the securities. For reasons other than speculation, banks will be allowed to trade in a "proprietary" manner. Banks can also continue to buy or sell from their own accounts to hedge against other investments.