New SAT Reading Practice Test 78: Sages and Fools

Home > SAT Test > SAT Reading Practice Tests

Test Information

Question 10 questions

Time 7 minutes

See All test questions

Take more free SAT Reading Practice Tests available from cracksat.net.

Sages and Fools

The entirety of human interaction fits under just three umbrellas. In the first, both
parties emerge from the rubble worse than before; the perpetrator of a murder gets life
in prison and the victim's day is ruined, so to speak. In the second, everybody wins;
I'm terrible at cooking and you're abysmal at housework, so you make us pizza while I
05attack the fungus under your couch. And as for the third, well, a cynic will say that this
is by far the largest umbrella—if it were a pie chart, we're talking everything but the
à la mode. We call this interaction category the zerosum, because anything gained
must come at the loss of another. Put another way, your tragedy is my windfall.
Welcome to the New Wall Street.
10Poker players are fond of saying that if you look around the table and can't spot
the fool, run away as fast as you can; you're it. The same goes for the world of finance,
which has quickly become as adversarial as a duel at high noon. Such is the nature of
equities, futures, bonds, and derivatives (to name a few): any transaction has both a
winner and a loser. Either the buyer has purchased an instrument that is undervalued
15and will be worth more tomorrow, or the seller has unloaded a bloated instrument that
will fall back closer to its "true" market valuation in the near future. Either way, dollars
(both unrealized and actual) will flow from one pocket to another.
Thus, within such a contentious system, it is to the advantage of all participants
to trade with the fool. And, if the fool can't be readily found, trust that one will be
20enticed. Leading up to the Crash of 2008, fools were aplenty as wild speculation was
the flavor du jour and sound financial theory was disregarded. Nowhere was this
act of leapingbeforeyoulook as flagrant as in the mortgage industry, where loans
were repeatedly and systematically extended to Americans with little to no chance
of repaying the interest, let alone the initial capital. Known as "subprime," high-risk
25borrowers with poor credit scores were extended money at interest rates far above
par. The banks' deluded thought process behind this was that the interest rates were
so high that, even if an inordinately large percentage of the borrowers defaulted, huge
profits were still guaranteed. Besides, worse comes to worst, the bank still owns the
house. It was a foolproof plan.
30Until it wasn't. The housing bubble had finally burst. It wasn't just that a few people
defaulted; rather, foreclosures were everywhere you looked. And, even worse, when
the banks came by to collect the keys, the houses were now worth only fractions of
what the banks lent for them. Consequently, they lost billions.
Here's the kicker: while the American financial system nearly collapsed, some had
35seen the fool coming from miles away, secretly cheering with each misstep by the savings
and loan industry. So, while the guardians of the money boxes continued speculating
on what they thought to be diamonds, a small handful on the fringes knew that
it was nothing but coal. And they profited spectacularly.
Through a convoluted, abstruse instrument known as a "credit default swap," these
40sages were able to make fortunes off of the mortgage implosions, laughing all the way
to the bank (where nobody else most certainly was laughing). It was an adroit play by
the sages, recognizing an obscure opportunity and capitalizing on the perfect storm.
But, such were the just deserts of each party, and such is the black and white duality of
the system. One is destined to lose his shirt, and another expands his wardrobe.

1. Which choice best summarizes the passage?

  • A. An explanation of how structural flaws in the financial system led to a near economic collapse
  • B. An analysis of dishonesty in banking and what measures consumers should have taken to protect themselves when the housing bubble burst
  • C. A presentation of how foolish consumers fall prey to predatory "sage" investors
  • D. An account of how universal profitability would have prevented the 2008 stock market crash

2. The narrator indicates that banks and lenders thought subprime loans would end up profitable because

  • A. most borrowers pay back their loans.
  • B. high interest rates would offset defaults.
  • C. housing prices remain steady through economic cycles.
  • D. credit default swap was a safety net.

3. Which choice provides the best evidence for the answer to the previous question?

  • A. Lines 5-8 ("And as . . . windfall")
  • B. Lines 14-17 ("Either . . . another")
  • C. Lines 26-29 ("The banks' . . . plan")
  • D. Lines 39-41 ("Through . . . laughing")

4. As used in line 15, the word "bloated" most closely means

  • A. overvalued.
  • B. distended.
  • C. full.
  • D. waterlogged.

5. According to the paragraph in lines 18-29, what factors contributed to the Crash of 2008?

  • A. Greedy banks attempted to profit off unsuspecting homeowners.
  • B. There were too many speculators and sound financial theory was rejected.
  • C. Zerosum interactions do not work in economic theory.
  • D. Stocks were undervalued and Wall Street was adversarial.

6. In line 30 "The housing bubble had finally burst" means what happened?

  • A. Homes were worth less than when they were mortgaged.
  • B. Homes were destroyed across the country.
  • C. No new homes were being built.
  • D. Home prices remained steady for several years.

7. In line 36, "guardians of the money boxes" most nearly refers to

  • A. fringe investors.
  • B. the American consumer.
  • C. mainstream banks.
  • D. the Federal government.

8. As used in line 39, the word "abstruse" most closely means

  • A. sinister.
  • B. perplexing.
  • C. sub rosa.
  • D. weighty.

9. The narrator would agree that all of the following are examples of "zerosum" EXCEPT

  • A. selling an overvalued stock and making a profit.
  • B. using "credit default swap" to capitalize on defaulted mortgages.
  • C. ordering a pizza dinner while another person completes housework.
  • D. defaulting on a loan and discharging the balance in bankruptcy court.

10. Which choice provides the best evidence for the answer to the previous question?

  • A. Lines 3-5 ("In the . . . couch")
  • B. Lines 26-29 ("The banks' . . . plan")
  • C. Lines 34-36 ("Here's . . . industry")
  • D. Lines 39-41 ("Through . . . laughing")