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Discussion Paper
Creditor Recovery in Lehman’s Bankruptcy
Denison, Erin; 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
How Much Value Was Destroyed by the Lehman Bankruptcy?
Fleming, Michael J.; Sarkar, Asani; Denison, Erin (2019-01-14)
Lehman Brothers Holdings Inc. (LBHI) filed for Chapter 11 bankruptcy protection on September 15, 2008, initiating one of the largest and most complex bankruptcy proceedings in history. Recovery prospects for creditors, who submitted about $1.2 trillion of claims against the Lehman estate, were quite bleak. This week, we will publish a series of four posts that provide an assessment of the value lost to Lehman, its creditors, and other stakeholders now that the bankruptcy proceedings are winding down. Where appropriate, we also consider the liquidation of Lehman?s investment banking affiliate, ...
Liberty Street Economics , Paper 20190114b

Discussion Paper
Lehman's Bankruptcy Expenses
Denison, Erin; 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 its ...
Liberty Street Economics , Paper 20190115

Discussion Paper
Customer and Employee Losses in Lehman’s Bankruptcy
Fleming, Michael J.; Sarkar, Asani; Denison, Erin (2019-01-16)
In our second post on the Lehman bankruptcy, we discussed the cost to Lehman?s creditors from having their funds tied up in bankruptcy proceedings. In this post, we focus on losses to Lehman?s customers and employees from the destruction of firm-specific assets that could not be deployed as productively with other firms. Our conclusions are based in part on what happened after bankruptcy?whether, for example, customer accounts moved to other firms or employees found jobs elsewhere. While these costs are difficult to pin down, the analysis suggests that the most notable losses were borne by ...
Liberty Street Economics , Paper 20190116

Discussion Paper
The Indirect Costs of Lehman’s Bankruptcy
Fleming, Michael J.; Sarkar, Asani; Denison, Erin (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

Report
Financial frictions, real estate collateral, and small firm activity in Europe
Banerjee, Ryan N.; Blickle, Kristian S. (2018-10-01)
We observe significant heterogeneity in the correlation between changes in house prices and the growth of small firms across certain countries in Europe. We find that, overall, the correlation is far greater in Southern Europe than in Northern Europe. Using a simple model, we show that this heterogeneity may relate to financial frictions in a country. We confirm the model?s propositions in a number of empirical analyses for the following countries in Northern and Southern Europe: the United Kingdom, Norway, France, Italy, Spain, and Portugal. Small firms in countries with higher financial ...
Staff Reports , Paper 868

Report
Are banks really special? New evidence from the FDIC-induced failure of healthy banks
Ashcraft, Adam B. (2003-12-01)
The FDIC used cross-guarantees to close thirty-eight subsidiaries of First Republic Bank Corporation in 1988 and eighteen subsidiaries of First City Bancorporation in 1992 when lead banks from each of these Texas-based bank holding companies were declared insolvent. I use this exogenous failure of otherwise healthy subsidiary banks as a natural experiment for studying the impact of bank failure on local-area real economic activity. I find that the closings of the subsidiaries were associated with a significant decline in bank lending that led to a permanent reduction in real county income of ...
Staff Reports , Paper 176

Working Paper
Endogenous Debt Maturity: Liquidity Risk vs. Default Risk
Manuelli, Rodolfo E.; Sanchez, Juan M. (2018-10-01)
We study the endogenous determination of corporate debt maturity in a setting with default risk. We assume that firms must access the bond market and they issue debt with a flexible structure (coupon, face value, and maturity). Initially, the firm is in a low growth/illiquid state that requires debt refinancing if it matures. Since lenders do not refinance projects with positive but small net present value, firms may be forced to default in the first phase. We call this liquidity risk. The technology is such that earnings can switch to a higher (but riskier) level. In this second phase firms ...
Working Papers , Paper 2018-34

Working Paper
The dynamics of subprime adjustable-rate mortgage default: a structural estimation
Li, Wenli; Fang, Hanming; Kim, You Suk (2016-01-11)
We present a dynamic structural model of subprime adjustable-rate mortgage (ARM) borrowers making payment decisions, taking into account possible consequences of different degrees of delinquency from their lenders. We empirically implement the model using unique data sets that contain information on borrowers' mortgage payment history, their broad balance sheets, and lender responses. Our investigation of the factors that drive borrowers' decisions reveals that subprime ARMs are not all alike. For loans originated in 2004 and 2005, the interest rate resets associated with ARMs as well as the ...
Working Papers , Paper 16-2

Working Paper
An anatomy of u.s. Personal bankruptcy under chapter 13
Li, Wenli; Eraslan, Hulya; Koşar, Gizem; Sarte, Pierre-Daniel G. (2014-10-29)
We build a structural model of Chapter 13 bankruptcy that captures salient features of personal bankruptcy under Chapter 13. We estimate our model using a novel data set we construct from bankruptcy court dockets recorded in Delaware between 2001 and 2002. Our estimation results highlight the importance of debtor?s choice of repayment plan length on Chapter 13 outcomes under the restrictions imposed by the bankruptcy law. We use the estimated model to conduct policy experiments to evaluate the impact of more stringent provisions of Chapter 13 that impose additional restrictions on the length ...
Working Papers , Paper 14-33

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