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Jel Classification:G33 

Discussion Paper
How Much Value Was Destroyed by the Lehman Bankruptcy?

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

Working Paper
The dynamics of subprime adjustable-rate mortgage default: a structural estimation

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
Collateral Runs

This paper models an unexplored source of liquidity risk faced by large broker-dealers: collateral runs. By setting different contracting terms on repurchase agreements with cash borrowers and lenders, dealers can source funds for their own activities. Cash borrowers internalize the risk of losing their collateral in case their dealer defaults, prompting them to withdraw it. This incentive creates strategic complementarities for counterparties to withdraw their collateral, reducing a dealer's liquidity position and compromising her solvency. Collateral runs are markedly different than ...
Finance and Economics Discussion Series , Paper 2018-022

Working Paper
ENDOGENOUS/EXOGENOUS SEGMENTATION IN THE A-IRB FRAMEWORK AND THE PRO-CYCLICALITY OF CAPITAL: AN APPLICATION TO MORTGAGE PORTFOLIOS

This paper investigates the pro-cyclicality of capital in the advanced internal ratings-based (A-IRB) Basel approach for retail portfolios and identifies the fundamental assumptions required for stable A-IRB risk weights over the economic cycle. Specifically, it distinguishes between endogenous and exogenous segmentation risk drivers and, through application to a portfolio of first mortgages, shows that risk weights remain stable over the economic cycle when the segmentation scheme is derived using exogenous risk drivers, while segmentation schemes that include endogenous risk drivers are ...
Working Papers , Paper 17-9

Working Paper
The Firm Size and Leverage Relationship and Its Implications for Entry and Concentration in a Low Interest Rate World

Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties and borrow with the option to default against their future cash ow. A variety can die with a constant probability, implying that bigger firms (those with more varieties) have lower coefficient of variation of sales and higher leverage. A lower risk-free rate benefits bigger firms more as they are able to lever more and existing firms buy more of the new varieties arriving into the economy. This leads to lower startup rates and greater concentration of ...
Working Papers , Paper 19-18

Working Paper
Safe Collateral, Arm's-Length Credit : Evidence from the Commercial Real Estate Mortgage Market

When collateral is safe, there are less opportunities for things to go wrong. We examine matching between collateral and creditors in the commercial real estate mortgage market by comparing loans in commercial mortgage backed securities (CMBS) conduits and bank portfolios. We model CMBS financing as lower cost but less informed, such that only safe collateral is funded by CMBS. This prediction is tested using the 2007-2009 shutdown of the CMBS market as a natural experiment. The loans funded by banks that would have been securitized are less likely to default or be renegotiated, indicating ...
Finance and Economics Discussion Series , Paper 2017-056

Working Paper
Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry

Institutional investors often own significant equity in firms that compete in the same product market. These "common owners" may have an incentive to coordinate the actions of firms that would otherwise be competing rivals, leading to anti-competitive pricing. This paper uses data on airline ticket prices to test whether common owners induce anti-competitive pricing behavior. We find little evidence to support such a hypothesis, and show that the positive relationship between average ticket prices and a commonly used measure of common ownership previously documented in the literature is ...
FRB Atlanta Working Paper , Paper 2019-15

Report
Zombies at Large? Corporate Debt Overhang and the Macroeconomy

With business leverage at record levels, the effects of corporate debt overhang on growth and investment have become a prominent concern. In this paper, we study the effects of corporate debt overhang based on long-run cross-country data covering the near-universe of modern business cycles. We show that business credit booms typically do not leave a lasting imprint on the macroeconomy. Quantile local projections indicate that business credit booms do not affect the economy’s tail risks either. Yet in line with theory, we find that the economic costs of corporate debt booms rise when ...
Staff Reports , Paper 951

Working Paper
Bankruptcy and Delinquency in a Model of Unsecured Debt

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 Paper , Paper 16-12

Working Paper
The Firm Size and Leverage Relationship and Its Implications for Entry and Business Concentration

Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties and borrow with the option to default against their future cash flow. A variety can die with a constant probability, implying that bigger firms (those with more varieties) have a lower coefficient of variation of sales and higher leverage. A lower risk-free rate benefits bigger firms more as they are able to lever more and existing firms buy more of the new varieties arriving into the economy. This leads to lower startup rates and greater concentration ...
Working Papers , Paper 20-29

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