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Discussion Paper
Creditor Recovery in Lehman’s Bankruptcy
Erin Denison; Sarkar, Asani; Fleming, Michael J. (2019-01-14)
Expectations of creditor recovery were low when the Lehman Brothers bankruptcy process started. On the day the firm filed for bankruptcy in September 2008, the average price of Lehman’s senior bonds implied a recovery rate of about 30 percent for senior creditors. A month later the bond price was implying a recovery rate of 9 percent, consistent with results from Lehman’s CDS auction. Two and a half years later, Lehman’s estate estimated that the recovery rate for holding company creditors would be just 16 percent. So, ten years after the filing, how much did creditors actually recover?
Liberty Street Economics , Paper 20190114a

Discussion Paper
Counterparty and Collateral Policies of Central Bank Lending Facilities
Sarkar, Asani; Helene Lee (2017-08-16)
In a previous post, we compared the Federal Reserve’s discount window with the standing lending facilities (SLFs) at the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We showed that the Fed’s discount window was less integrated with monetary policy than the SLFs of the other central banks. In this post, we observe that the counterparty and collateral policies of the Fed’s discount window are similarly less integrated with the practices involved in monetary policy operations, in comparison with the other central banks.
Liberty Street Economics , Paper 20170816

Discussion Paper
Is Stigma Attached to the European Central Bank's Marginal Lending Facility?
Sarkar, Asani; Helene Lee (2018-04-16)
The European Central Bank (ECB)’s marginal lending facility has been used by banks to borrow funds both in normal times and during the crisis that started in 2007. In this post, we argue that how a central bank communicates the purpose of a facility is important in determining how users of the facility are perceived. In particular, the ECB never refers to the marginal lending facility as a back-up source of funds. The ECB’s neutral approach may be a key factor in explaining why financial institutions are less reluctant to use the marginal lending facility than the Fed’s discount window.
Liberty Street Economics , Paper 20180416

Discussion Paper
Lehman's Bankruptcy Expenses
Erin Denison; Sarkar, Asani; Fleming, Michael J. (2019-01-15)
In bankruptcy, firms incur expenses for services provided by lawyers, accountants, and other professionals. Such expenses can be quite high, especially for complex resolutions. These direct costs of bankruptcy proceedings reduce a firm’s value below its fundamental level, thus constituting a “deadweight loss.” Bankruptcy also carries indirect costs, such as the loss in value of assets trapped in bankruptcy—a subject discussed in our previous post. In this post, we provide the first comprehensive estimates of the direct costs of resolving Lehman Brothers’ holding company (LBHI) and ...
Liberty Street Economics , Paper 20190115

Discussion Paper
The Indirect Costs of Lehman’s Bankruptcy
Erin Denison; Sarkar, Asani; Fleming, Michael J. (2019-01-17)
In our previous post, we assessed losses to customers and clients from foregone opportunities after Lehman Brothers filed for bankruptcy in September 2008. In this post, we examine losses to Lehman and its investors in anticipation of bankruptcy. For example, if bankruptcy is expected, Lehman’s earnings may decline as customers close their accounts or certain securities (such as derivatives) to which Lehman is a counterparty may lose value. We estimate these losses by analyzing Lehman’s earnings and stock, bond, and credit default swap (CDS) prices.
Liberty Street Economics , Paper 20190117

Discussion Paper
Securing Secured Finance: The Term Asset-Backed Securities Loan Facility
Caviness, Elizabeth; Sarkar, Asani (2020-08-07)
The asset-backed securities (ABS) market, by supporting loans to households and businesses such as credit card and student loans, is essential to the flow of credit in the economy. The COVID-19 pandemic disrupted this market, resulting in higher interest rate spreads on ABS and halting the issuance of most ABS asset classes. On March 23, 2020, the Fed established the Term Asset-Backed Securities Loan Facility (TALF) to facilitate the issuance of ABS backed by a variety of loan types including student loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA), ...
Liberty Street Economics , Paper 20200807

Discussion Paper
Is There Stigma to Discount Window Borrowing?
Armantier, Olivier; Shrader, Jeffrey; Sarkar, Asani; Ghysels, Eric (2011-08-31)
The Federal Reserve employs the discount window (DW) to provide funding to fundamentally solvent but illiquid banks (see the March 30 post “Why Do Central Banks Have Discount Windows?”). Historically, however, there has been a low level of DW use by banks, even when they are faced with severe liquidity shortages, raising the possibility of a stigma attached to DW borrowing. If DW stigma exists, it is likely to inhibit the Fed’s ability to act as lender of last resort and prod banks to turn to more expensive sources of financing when they can least afford it. In this post, we provide ...
Liberty Street Economics , Paper 20110831

Discussion Paper
Did the Fed’s Term Auction Facility Work?
Sarkar, Asani; McAndrews, James J.; Wang, Zhenyu (2011-10-11)
The Federal Reserve introduced the Term Auction Facility (TAF) in December 2007 to provide term loans to banks during the recent financial crisis. In this post, we report on the effectiveness of the TAF during the early stages of the crisis. We find that the TAF was associated with a decrease in the “liquidity premium,” one component of a bank’s borrowing cost. In other words, the TAF worked as intended.
Liberty Street Economics , Paper 20111011

Discussion Paper
How Might Increased Transparency Affect the CDS Market?
Sarkar, Asani; Fleming, Michael J.; Chen, Kathryn; Li, Ada; Jackson, John (2011-11-23)
The credit default swap (CDS) market has grown rapidly since the asset class was developed in the 1990s. In recent years, and especially since the onset of the financial crisis, policymakers both in the United States and abroad have begun to strengthen regulations governing derivatives trading, with a particular focus on the decentralized and opaque nature of current trading arrangements. For example, the Dodd-Frank Act will require U.S.-based market participants to publicly report details of their CDS trades. In this post, we discuss the possible impact of increased transparency in the CDS ...
Liberty Street Economics , Paper 20111123

Discussion Paper
History of Discount Window Stigma
Armantier, Olivier; Sarkar, Asani; Lee, Helene (2015-08-10)
In August 2007, at the onset of the recent financial crisis, the Federal Reserve encouraged banks to borrow from the discount window (DW) but few did so. This lack of DW borrowing has been widely attributed to stigma--concerns that, if discount borrowing were detected, depositors, creditors, and analysts could interpret it as a sign of financial weakness. In this post, we review the history of the DW up until 2003, when the current DW regime was established, and argue that some past policies may have inadvertently contributed to a reluctance to borrow from the DW that persists to this day.
Liberty Street Economics , Paper 20150810

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