Restoring Financial Stability E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 660

Veröffentlichungsjahr: 2009

Beschreibung

An insightful look at how to reform our broken financial system

The financial crisis that unfolded in September 2008 transformed the United States and world economies. As each day's headlines brought stories of bank failures and rescues, government policies drawn and redrawn against the backdrop of an historic Presidential election, and solutions that seemed to be discarded almost as soon as they were proposed, a group of thirty-three academics at New York University Stern School of Business began tackling the hard questions behind the headlines. Representing fields of finance, economics, and accounting, these professors-led by Dean Thomas Cooley and Vice Dean Ingo Walter-shaped eighteen independent policy papers that proposed market-focused solutions to the problems within a common framework. In December, with great urgency, they sent hand-bound copies to Washington. Restoring Financial Stability is the culmination of their work.

• Proposes bold, yet principled approaches-including financial policy alternatives and specific courses of action-to deal with this unprecedented, systemic financial crisis
• Created by the contributions of various academics from New York University's Stern School of Business
• Provides important perspectives on both the causes of the global financial crisis as well as proposed solutions to ensure it doesn't happen again
• Contains detailed evaluations and analyses covering many spectrums of the marketplace

Edited by Matthew Richardson and Viral Acharya, this reliable resource brings together the best thinking of finance and economics from the faculty of one of the top universities in world.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Foreword

Acknowledgements

Prologue

The Financial Crisis of 2007-2009: Causes and Remedies - Viral V. Acharya, ...

PART One - Causes of the Financial Crisis of 2007-2009

CHAPTER 1 - Mortgage Origination and Securitization in the Financial Crisis

1.1 INTRODUCTION: THE U.S. MORTGAGE MARKET

1.2 SOME SALIENT FACTS

1.3 WHAT WENT WRONG?

1.4 PRINCIPLES

1.5 PROPOSALS

1.6 CONCLUSION

NOTES

REFERENCES

CHAPTER 2 - How Banks Played the Leverage Game

2.1 CREDIT RISK TRANSFER AND BANK LEVERAGE

2.2 ASSET-BACKED COMMERCIAL PAPER CONDUITS

2.3 BANK BALANCE SHEETS AND RISK-WEIGHTED ASSETS

2.4 WAYS TO COUNTER REGULATORY ARBITRAGE AND AGGREGATE RISK SHIFTING

NOTES

REFERENCES

CHAPTER 3 - The Rating Agencies Is Regulation the Answer?

3.1 BACKGROUND

3.2 WHAT IS THE PROBLEM?

3.3 PRINCIPLES AND REGULATION PROPOSALS

3.4 CONCLUSION

NOTES

REFERENCES

PART Two - Financial Institutions

CHAPTER 4 - What to Do about the Government-Sponsored Enterprises?

4.1 BACKGROUND

4.2 SECURITIZATION

4.3 THE GSEs’ MORTGAGE INVESTMENT STRATEGY

4.4 THE FINANCIAL CRISIS OF 2007-2009

4.5 ON REGULATORY REFORM OF THE GSEs

4.6 SPECIFIC PROPOSALS

NOTES

REFERENCES

CHAPTER 5 - Enhanced Regulation of Large, Complex Financial Institutions

5.1 WHAT ARE LARGE, COMPLEX FINANCIAL INSTITUTIONS?

5.2 WHERE DID THEY COME FROM?

5.3 THE BIG BALANCE SHEET BUSINESS MODEL

5.4 IS THERE VALUE IN LCFIs?

5.5 BROADENING OF LCFI BAILOUT GUARANTEES

5.6 THE REGULATORY CHALLENGE

5.7 GLOBAL DIMENSIONS

NOTES

REFERENCES

CHAPTER 6 - Hedge Funds in the Aftermath of the Financial Crisis

6.1 WHAT ARE HEDGE FUNDS?

6.2 HOW DO HEDGE FUNDS ADD VALUE?

6.3 PROBLEMS ASSOCIATED WITH HEDGE FUNDS

6.4 PRINCIPLES

6.5 REGULATION OF HEDGE FUNDS IN THE AFTERMATH OF THE CRISIS

6.6 CONCLUSION

NOTES

REFERENCES

PART Three - Governance, Incentives, and Fair Value Accounting Overview

CHAPTER 7 - Corporate Governance in the Modern Financial Sector

7.1 INTRODUCTION

7.2 CORPORATE GOVERNANCE AT LCFIs

7.3 DID GOVERNANCE FAIL?

7.4 COMPENSATION AT FINANCIAL FIRMS

NOTES

REFERENCES

CHAPTER 8 - Rethinking Compensation in Financial Firms

8.1 INTRODUCTION

8.2 EXAMPLES OF MISALIGNED APPROACHES TO COMPENSATION

8.3 SENIOR MANAGEMENT COMPENSATION

8.4 COMPENSATING HIGH-PERFORMANCE EMPLOYEES IN BANKING AND FINANCE

8.5 HOW DOES THE FINANCIAL SERVICES SECTOR COMPARE TO OTHERS?

8.6 SEEKING CHANGE

NOTES

REFERENCES

CHAPTER 9 - Fair Value Accounting

9.1 INTRODUCTION

9.2 OVERVIEW OF FAIR VALUE ACCOUNTING VERSUS THE ALTERNATIVES ABSTRACTING FROM ...

9.3 FAS 157’s MEASUREMENT GUIDANCE

9.4 POTENTIAL CRITICISMS OF FAIR VALUE ACCOUNTING DURING THE CREDIT CRUNCH

NOTES

REFERENCES

PART Four - Derivatives, Short Selling, and Transparency

CHAPTER 10 - Derivatives: The Ultimate Financial Innovation

10.1 GENERAL BACKGROUND AND COST-BENEFIT ANALYSIS OF DERIVATIVES

10.2 THE CREDIT DERIVATIVES MARKET AND THE FINANCIAL CRISIS

10.3 PRINCIPLES OF REGULATING DERIVATIVES

10.4 REGULATION OF DERIVATIVES—SOME SUGGESTIONS

NOTES

REFERENCES

CHAPTER 11 - Centralized Clearing for Credit Derivatives

11.1 OTC CREDIT DERIVATIVES—A SNAPSHOT

11.2 WEAKNESSES IN THE CDS TRADING INFRASTRUCTURE: SOME EXAMPLES

11.3 THE BENEFITS OF CENTRALIZED CLEARING

11.4 POSSIBLE SOLUTIONS AND THEIR RELATIVE MERITS

11.5 DESIRABLE LEVELS OF TRANSPARENCY

11.6 RECENT PROPOSALS AND WILL THEY SUCCEED?

11.7 IMPLICATIONS FOR OTHER MARKETS

NOTES

REFERENCE

CHAPTER 12 - Short Selling

12.1 BACKGROUND

12.2 THE ISSUES

12.3 FINANCIAL MARKETS: FAIRNESS AND EFFICIENCY

12.4 WHO BENEFITS FROM SHORT SALES?

12.5 MARKET MANIPULATION AND REGULATORY RESPONSE

12.6 TRANSPARENCY AND REPORTING

12.7 CONCLUSION

NOTES

REFERENCES

PART Five - The Role of the Federal Reserve

SYSTEMIC RISK

LENDER OF LAST RESORT FACILITIES

MONETARY POLICY

CHAPTER 13 - Regulating Systemic Risk

13.1 INTRODUCTION

13.2 WHY SYSTEMIC FINANCIAL RISK MUST BE REGULATED

13.3 MEASURING A FIRM’S CONTRIBUTION TO SYSTEMIC RISK

13.4 REGULATING SYSTEMIC RISK

APPENDIX: EXAMPLES OF SYSTEMIC RISK IN THE CURRENT CRISIS

NOTES

REFERENCES

CHAPTER 14 - Private Lessons for Public Banking

14.1 INTRODUCTION

14.2 BAGEHOT RECONSIDERED

14.3 PRIVATE LINES OF CREDIT

14.4 CENTRAL BANK LENDING FACILITIES

14.5 CONCLUSIONS

NOTES

REFERENCES

PART Six - The Bailout

CHAPTER 15 - The Financial Sector Bailout Sowing the Seeds of the Next Crisis?

15.1 THE RESCUE PACKAGE

15.2 THE IMPLICATIONS: QUESTIONS OF INTEREST

15.3 THE CAPITAL INJECTION SCHEME

15.4 THE COMMERCIAL PAPER FUNDING FACILITY

15.5 POLICY RECOMMENDATIONS

NOTES

CHAPTER16 - Mortgages and Households

16.1 BACKGROUND

16.2 INCOMPLETE CONTRACTS AND DEBT-FOR-EQUITY SWAPS

16.3 AN ACTION PLAN

16.4 COMPARISON WITH ALTERNATIVE POLICIES

NOTES

REFERENCE

CHAPTER 17 - Where Should the Bailout Stop?

17.1 BACKGROUND

17.2 ON THE PROPER USE OF CHAPTER 11

17.3 DEBTOR-IN-POSSESSION FINANCING

17.4 OUR PROPOSED SOLUTION FOR AUTOMAKERS

17.5 CONCLUSION

NOTES

PART Seven - International Coordination

CHAPTER 18 - International Alignment of Financial Sector Regulation

18.1 THE CASE FOR INTERNATIONAL COORDINATION

18.2 ADDRESSING REGULATORY EXTERNALITY

18.3 HISTORY OF INTERNATIONAL COORDINATION EFFORTS

18.4 RECOMMENDED STEPS TO ACHIEVE INTERNATIONAL COORDINATION

NOTES

REFERENCES

About the Authors

Index

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Library of Congress Cataloging-in-Publication Data:

Restoring financial stability : how to repair a failed system / Viral V. Acharya and

Matthew Richardson, editors. p. cm.—(Wiley finance series)

Includes bibliographical references and index.

eISBN : 978-0-470-50108-5

1. Finance—United States. 2. Financial crises—Government policy—United States. 3. Banks and banking—United States. 4. Financial services industry—United States. 5. United States—Economic conditions—2001- I. Acharya, Viral V. II. Richardson, Matthew, 1964-

HG181.R37 2009

339.50973—dc22 2009004115

To Manjiree

—V.V.A.

To my best friend and love of my life, Julie, and our three wonders, Jack, Charlie, and Lucas.

—M.R.

Foreword

As 2008 was drawing to a close, we were reflecting on the dramatic and often unprecedented events of the past year in financial markets and the broader economy. Nothing like this had occurred in our lifetimes. In our academic world, few events have had as much potential for providing us and our colleagues with a rich source of raw material for good research and teaching for a long time to come. This is the ultimate teachable moment, and it is essential to teach it. We were in the middle of a financial and economic hurricane that was certain to leave behind massive financial and economic damage. It will eventually blow over, as all hurricanes do, but it is not too early to begin to think about what changes to the system can mitigate the damage and, it is hoped, make future financial storms less likely.

With one of the largest and best faculties in the world focused on finance, economics, and related disciplines—academics deeply rooted in their respective disciplines and also heavily exposed to the practices of modern financial institutions—we thought that the financial crisis provided a unique opportunity to harness our collective expertise and make a serious contribution to the repair efforts that are getting under way. We convened a small group of interested faculty, the idea caught on, and we decided to execute this project. All faculty members in the relevant disciplines at the Stern School of Business were invited to participate if they had the time and the interest, and 33 colleagues did so (participants are listed at the end of this volume).

Next, key topics related to the crisis and its resolution were identified, and individual teams of authors set to work. As a common format we used the white paper. Each starts by discussing the nature of the problem, where things went wrong, and where we are today, and then goes on to outline what options are available to repair the immediate damage and prevent a recurrence at the least possible cost to financial efficiency and growth, and offers a recommended course of action with respect to public policy or business conduct. Each white paper (many of which are substantially more definitive than we initially envisaged) is accompanied by a short, easily accessible Executive Summary, published separately in New York University Salomon Center’s academic journal Financial Markets, Institutions & Instruments (Blackwell, 2009). Each white paper was intensively debated both formally and informally among the group over six weeks or so, although no attempt was made to enforce uniformity of views.

This has been a unique opportunity to bring our cumulative expertise to bear on an overarching set of issues that will affect the national and global financial landscape going forward. We know that the repair process in the months and years to come will be highly politicized, and that special interests of all kinds will work hard to affect the outcomes. We also know that some of those entrusted with the repair have also been responsible for some of the damage. So we present here a set of views that are at once informed, carefully considered and debated, independent, and focused exclusively on the public interest.

THOMAS F. COOLEY, Dean INGO WALTER, Vice Dean New York University Stern School of Business

New York, New York

February 2009

Acknowledgments

First and foremost, we would like to thank all the faculty who participated in the writing of the white papers. We started this process in early November and completed the majority of the project by late December. Many of the faculty put a tremendous amount of time into this endeavor without really any type of reward at all. Special thanks should go to Anthony W. Lynch, Thomas Philippon, Rangarajan K. Sundaram, and Ingo Walter, who were involved and played a primary role in a number of white papers.

We benefited and were influenced by discussions on the overall theme with a number of co-authors, as well as academic colleagues and practitioners who do not appear in the book, especially Franklin Allen, Yakov Amihud, Sreedhar Bharath, Jacob Boudoukh, Darrell Duffie, Julian Franks, Douglas Gale, Anurag Gupta, Max Holmes, Timothy Johnson, Jeff Mahoney, Ouarda Merrouche, Holger Mueller, Eli Ofek, Matthew Pritzker, Raghuram Rajan, Orly Sade, Hyun Shin, Glen Suarez, Suresh Sundaresan, Richard Sylla, Vikrant Vig, S. “Vish” Viswanathan, and Tanju Yorulmazer.

Finally, special thanks need to be given to our PhD students, especially Hanh Le for proofreading and Farhang Faramand for research assistance, and New York University Salomon Center administrators Mary Jaffier and Robyn Vanterpool. And, of course, to Les Levi, Anjolein Schmeits, and Myron Scholes for reading the book cover to cover and giving many valuable comments that greatly improved the work.

VIRAL V. ACHARYA MATTHEW RICHARDSON

Prologue

A Bird’s-Eye View

The Financial Crisis of 2007-2009: Causes and Remedies

Viral V. Acharya, Thomas Philippon, Matthew Richardson, and Nouriel Roubini

The integration of global financial markets has delivered large welfare gains through improvements in static and dynamic efficiency—the allocation of real resources and the rate of economic growth. These achievements have, however, come at the cost of increased systemic fragility, evidenced by the ongoing financial crisis. We must now face the challenge of redesigning the regulatory overlay of the global financial system in order to make it more robust without crippling its ability to innovate and spur economic growth.

P.1 THE FINANCIAL CRISIS OF 2007-2009

The financial sector has produced large economic efficiencies because financial institutions, which play a unique role in the economy, act as intermediaries between parties that need to borrow and parties willing to lend or invest. Without such intermediation, it is difficult for companies to conduct business. Thus, systemic risk can be thought of as widespread failures of financial institutions or freezing up of capital markets that can substantially reduce the supply of capital to the real economy. The United States experienced this type of systemic failure during 2007 and 2008 and continues to struggle with its consequences as we enter 2009.

When did this financial crisis start and when did it become systemic?

The financial crisis was triggered in the first quarter of 2006 when the housing market turned. A number of the mortgages designed for a subset of the market, namely subprime mortgages, were designed with a balloon interest payment, implying that the mortgage would be refinanced within a short period to avoid the jump in the mortgage rate. The mortgage refinancing presupposed that home prices would continue to appreciate. Thus, the collapse in the housing market necessarily meant a wave of future defaults in the subprime area—a systemic event was coming. Indeed, starting in late 2006 with Ownit Mortgage Solutions’ bankruptcy and later on April 2, 2007, with the failure of the second-largest subprime lender, New Century Financial, it was clear that the subprime game had ended.

While subprime defaults were the root cause, the most identifiable event that led to systemic failure was most likely the collapse on June 20, 2007, of two highly levered Bear Stearns-managed hedge funds that invested in subprime asset-backed securities (ABSs). In particular, as the prices of the collateralized debt obligations (CDOs) began to fall with the defaults of subprime mortgages, lenders to the funds demanded more collateral. In fact, one of the funds’ creditors, Merrill Lynch, seized $800 million of their assets and tried to auction them off. When only $100 million worth could be sold, the illiquid nature and declining value of the assets became quite evident. In an attempt to minimize any further auctions at fire sale prices, possibly leading to a death spiral, two days later Bear Stearns injected $3.2 billion worth of loans to keep the hedge funds afloat.

This event illustrates the features that typify financial crises—a credit boom (which leads to the leveraging of financial institutions, in this case, the Bear Stearns hedge funds) and an asset bubble (which increases the probability of a large price shock, in this case, the housing market). Eventually, when shocks lead to a bursting of the asset bubble (i.e., the fall in house prices) and trigger a process of deleveraging, these unsustainable asset bubbles and credit booms go bust with the following three consequences:

1. The fall in the value of the asset backed by high leverage leads to margin calls that force borrowers to sell the bubbly asset, which in turn starts to deflate in value.

2. This fall in the asset value now reduces the value of the collateral backing the initial leveraged credit boom.

3. Then, margin calls and the forced fire sale of the asset can drive down its price even below its now lower fundamental value, creating a cascading vicious circle of falling asset prices, margin calls, fire sales, deleveraging, and further asset price deflation.