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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
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
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

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
Bankruptcy and delinquency in a model of unsecured debt
Athreya, Kartik B.; Sanchez, Juan M.; Tam, Xuan S.; Young, Eric R. (2012)
This paper documents and interprets two facts central to the dynamics of informal default or ?delinquency? on unsecured consumer debt. First, delinquency does not mean a persistent cessation of payment. In particular, we observe that for individuals 60 to 90 days late on payments, 85% make payments during the next quarter that allow them to avoid entering more severe delinquency. Second, many in delinquency (40%) have smaller debt obligations one quarter later. To understand these facts, we develop a theoretically and institutionally plausible model of debt delinquency and bankruptcy. Our ...
Working Papers , Paper 2012-042

Working Paper
Asymmetric Information, Dynamic Debt Issuance, and the Term Structure of Credit Spreads
Benzoni, Luca; Garlappi, Lorenzo; Goldstein, Robert S. (2019-09-02)
We propose a tractable model of a firm?s dynamic debt and equity issuance policies in the presence of asymmetric information. Because ?investment-grade? firms can access debt markets, managers who observe a bad private signal can both conceal this information and shield shareholders from infusing capital into the firm by issuing new debt to service existing debt, thus avoiding default. The implication is that the ?asymmetric information channel? can generate jumps to default (from the creditors? perspective) only for those "high-yield" firms that have exhausted their ability to borrow. Thus, ...
Working Paper Series , Paper WP-2019-8

Working Paper
Sectoral Loan Concentration and Bank Performance (2001-2014)
Sengupta, Rajdeep; Regehr, Kristen (2016-11-01)
Sectoral loan concentration is an important factor in bank performance. We develop a measure of sectoral loan concentration and study how community bank performance and the size-performance relationship vary with loan concentration and changes in loan concentration. The size-profitability relationship varies with concentration in the residential real-estate (RRE) sector. Higher RRE concentration is associated with lower returns especially for larger community banks?banks with assets totaling a billion or more. Concentration in other sectors, such as agriculture and commercial real estate ...
Research Working Paper , Paper RWP 16-13

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