Reading Passage Question

For much of the twentieth century, Saving and Loans (S&L) banks made mortgage loans to individual middle class families, allowing many to buy houses. In the 1970s, the combination of inflation and falling oil prices created economic conditions to place S&L banks at risk. In the early 1980s, Congress deregulated the S&L banks, allowing them to expand the kinds of investments from which they drew profits.

The deregulation was designed to open beneficial options which would allow the flagging S&L banks to save themselves. Instead, many S&L banks pursued investments in sectors they did not understand well, such as commercial real estate: they entered these sectors with large amounts of cash although they were not fully apprised of the risks. The collapse of the housing market in the mid 1980's, following an unprecedented building boom over the previous ten years, led to the failure of numerous S&L banks. As these banks were protected by federal insurance, this collapse cost the American taxpayers over $100 billion. In some of the S&L banks that failed, the bank leaders were found guilty of embezzlement and other kinds of fraud. In some cases, the burden of fraud caused otherwise viable banks to fail, and in other cases, a bank that was going to fail anyway had its life prolonged by fraud, creating additional expenses for the federal bank bailout.

Former bank regulator William Black has argued that the US government has not adequately learned important lessons from the S&L crisis. While stronger regulations for all banks are in place now, little has been done to strengthen the fraud procedures. Black has pointed out that bank fraud has the opportunity to thrive whenever regulation or oversight is loosened, and systemic occurrences of bank fraud pose a major risk to the well-being of the economy. While individuals may resist fraud because of their own ethics, this is not sufficient to protect the economy as a whole. Congressmen, responding to Black's charges, argue that the SEC has in place strict guidelines for what constitutes bank fraud, and that both SEC investigators and congressmen themselves are well-poised to detect even individual instances of fraud, to say nothing of widespread fraud. Black points out that SEC investigators do not have criminologist training: while they understand the rules well, they are not familiar with all the methods used to subvert or violate them. Furthermore, congressmen, under certain conditions, can turn a blind eye to bank fraud. For example, in the 1980s, the so-called "Keating five" senators accepted cash contributions from Charles Keating, the head of a S&L bank, and in return gave Mr. Keating undue protection which allowed him to continue his fraud.

“For much of the twentieth century, Saving and Loans (S&L) banks made mortgage loans to middle class families”- is a comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension. This GMAT Reading Comprehension consists of 4 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

1. The passage mentioned the "unprecedented building boom" of the late 1970s and early 1980s in order to

1. show how the commercial real market responds to changes in oil prices
2. provide an example of conditions susceptible to fraud
3. give evidence of the disappearance of the middle class
4. explain the economic circumstances that were supporting the Savings and Loan banks in that period
5. demonstrate what kept some Savings and Loan banks in business through the crisis

2. The primary purpose of this passage is to

1. outline the ethical issues that arise in banking
2. indicate a potential vulnerability in the national economy
3. trace the history of the Savings and Loans crisis
4. describe Black's contribution to banking theory
5. explain the leading economic forces dominating the American economy in the 1980s

3. The passage implies which of the following?

1. All bank deregulation leads to instances of fraud.
2. William Black regulated a Savings and Loans bank.
3. Without bank fraud, the Saving and Loans crisis would not have happened.
4. Congressmen are well-informed about the operation of the SEC.
5. Criminologists have a deep understanding of how to subvert the law.

4. The final paragraph implies which of the following?

1. Not all of those implicated on charges of financial fraud were bank leaders.
2. Less attention has been given to fraud procedures than to stronger bank regulations.
3. A solid grounding in ethics is a reliable deterrent to financial fraud.
4. Understanding the way in which financial rules are commonly subverted is closely tied to a criminologist's training.
5. Several politicians involved in the Keating scandal were indicted on charges of financial fraud.

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