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This post is the tenth in a series of thirteen Liberty Street Economics posts on Large and Complex Banks.For more on this topic, see this special issue of the Economic Policy Review.
The bankruptcy of Lehman Brothers and its 209 registered subsidiaries was one of the largest and most complex in history, with more than $1 trillion of creditor claims in the United States alone, four bodies of applicable U.S. laws, and insolvency proceedings that involved over eighty international legal jurisdictions. The experience of resolving Lehman has led to an active debate regarding the effectiveness of applying the U.S. Chapter 11 Bankruptcy Code to complex financial institutions. In this post, we draw on our Economic Policy Review article to highlight the challenges of resolving Lehman in the U.S. Bankruptcy Court.
This post is the second in a series of thirteen Liberty Street Economics posts on Large and Complex Banks. For more on this topic, see this special issue of the Economic Policy Review.
Despite recent financial reforms, there is still widespread concern that large banking firms remain “too big to fail.” As a solution, some reformers advocate capping the size of the largest banking firms. One consideration, however, is that while early literature found limited evidence for economies of scale, recent academic research has found evidence of scale economies in banking, even for the largest banking firms, implying that such caps could impose real costs on the economy. In our contribution to the volume on large and complex banks, we extend this line of research by studying the relationship between bank holding company (BHC) size and components of noninterest expense, in order to shed light on the sources of the scale economies identified in previous literature.
In global finance, leveraged buyouts (LBOs) are an important tool for restructuring corporations. LBO activities have had a turbulent history in the United States over the last three decades—from the junk-bond-financed wave of the 1980s to the most recent boom-and-bust episode of 2006-07 caused by the collapse of asset-backed securitization. The stylized view is that buyouts are a tool for extracting value through reorganization by streamlining low-growth public firms that have stable cash flows. This post shows that younger public firms experiencing weak financial interest from security analysts and low investor recognition are also more likely to go private. In many cases, founders and managers of these firms with insufficient analyst following had the opportunity to ascertain firsthand the costs and benefits of both private and public ownership, and they decided to go private again.
In this post, we offer comparisons between banks with and without publicly traded equity. Our post uses the link produced by the New York Fed containing regulatory identification numbers (RSSD ID) from the National Information Center (NIC) to the permanent company number (PERMCO) used by the Center for Research in Security Prices (CRSP). The list available via the data link allows researchers to match regulatory information on U.S. bank holding companies (BHCs) with equity market information, including security prices. The link can be used to assist academic papers that conduct event studies on banks (recent papers using these data include Baker and Wurgler  and Ettredge et al. ).
Jaison R. Abel, Jason Bram, Richard Deitz, and James Orr
As most of the New York metropolitan region begins to get back to normal following the devastation caused by superstorm Sandy, researchers and analysts are trying to assess the total “economic cost” of the storm. But what, exactly, is meant by economic cost? Typically, those tallying up the economic cost of a disaster think of two types of costs: loss of capital (property damage and destruction) and loss of economic activity (caused by disruptions). But there is another important type of economic loss that often is not estimated or discussed in policymaking decisions: loss of welfare or deterioration in quality of life. Here we focus on how superstorm Sandy (and other such disasters) can have widespread adverse effects on quality of life, and provide some illustrations of how one can try to put an approximate dollar value on this type of cost.
In a new working
Lerner and I explore how the
venture capital (VC) model can be harnessed to achieve socially targeted ends
by examining the investment record of community development venture capital (CDVC)
firms. Our results are mixed. Investments made by CDVC firms are less likely to
succeed than are investments made by traditional VC firms. This lower
probability of success persists even after controlling for the fact that CDVC
firms invest in industries and geographies that have, on average, lower success
rates. However, we do find that CDVC firms have the benefit of bringing
traditional VC firms to underserved regions; controlling for the presence of
traditional VC investments, we find that each additional CDVC investment draws an
additional 0.06 new traditional VC firms to a region.
Stocks are usually offered in initial public offerings (IPOs) at a discount,
leading to large first-day IPO returns. When there is a risk of a negative initial
return, underwriters are known to actively support the aftermarket price of a
stock through buying activities. In this post, we look at the trading book for
Facebook stock on May 18, 2012, the day of its highly anticipated IPO. Using
what we call a “large integer–price bid” identification assumption to indirectly infer which investors are bidding, we find evidence of significant trading by underwriters seeking to stabilize the stock’s price. This evidence suggests that underwriters incurred significant costs as a result of these activities.
The high valuations achieved by recent social-media- and Internet-related initial public offerings (IPOs) and their disappointing aftermarket performance have rekindled the specter of the dot-com boom and bust of the late 1990s. This post extends the analysis of my 2004 Current Issues article (with Gijoon Hong) that documents a gradual but significant deterioration in the quality of issuing companies since the 1980s, a trend that reached a low point with the bursting
of the Internet bubble in 2000. Despite considerable investor interest in
recent web startups, the volume of IPO proceeds has remained weak since the
2000 Internet collapse. An important lesson of the boom-and-bust episode is
that a viable and well-functioning IPO market must be based on companies with
sound fundamentals and business plans. Although there are no signs of another
tech bubble, my post shows that IPO companies have remained, on average, weak
financially over the 2001-11 period.
In a 2012 New York Fed study, Chenyang Wei and I find that interest rate spreads on publicly traded bonds issued by companies with privately traded equity are about 31 basis points higher on average than spreads on bonds issued by companies with publicly traded equity, even after controlling for risk and other factors. These differences are economically and statistically significant and they persist in the secondary market. We control for many factors associated with bond pricing, including risk, liquidity, and covenants. Although these controls account for some of the absolute pricing difference, the price wedge between public and private companies remains. Despite these pricing differences, private companies with public bonds are no more likely to go bankrupt or to be downgraded than are similar public companies. In this post, we briefly summarize the findings of our study.
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
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