Say It Ain’t So
NBER paper of the day:
We analyze asset-backed commercial paper conduits which played a central role in the early phase of the financial crisis of 2007-09. We document that commercial banks set up conduits to securitize assets while insuring the newly securitized assets using credit guarantees. The credit guarantees were structured to reduce bank capital requirements, while providing recourse to bank balance sheets for outside investors. Consistent with such recourse, we find that banks with more exposure to conduits had lower stock returns at the start of the financial crisis; that during the first year of the crisis, asset-backed commercial paper spreads increased and issuance fell, especially for conduits with weaker credit guarantees and riskier banks; and that losses from conduits mostly remained with banks rather than outside investors. These results suggest that banks used this form of securitization to concentrate, rather than disperse, financial risks in the banking sector while reducing their capital requirements.
If anyone knows of Tom points us to an “ungated” version from three weeks ago , please mention it in comments or e-mail.
I don’t see this paper really going that far on the policy side. They recommend setting up a super regulator that would monitor and enforce capital requirements both in terms of quality and amount. I really don’t see the widom of a system where everyone in the commercial paper market would have to ask for permission to engage in market activity and to to report all their holdings and transactions to a regulator. This is just too much regualtion and government imposing itself and slowing down commerce.
I actually agree. I think we should let them fail or succed on their own. When they go bankrupt, and they will, we can have the government lend directly instead of going through the intermediaries. If they want to drive themself to extinction as opposed to being prevented from it by regulation, let them go. We’ve seen what happens when we spend many times our GDP to quarentee their business (those notes will come due eventually) and the way we are treated afterwards. Enough is enough.