Rien ne va plus - The 2007/2008 Credit Crunch and what gambling Bankers had to do with it
Hofmann, Anett (2009) Rien ne va plus - The 2007/2008 Credit Crunch and what gambling Bankers had to do with it. Working Paper. University of Warwick, Department of Economics, Coventry.
WRAP_Hofmann_twerp_892.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
The paper argues that the incidence of moral hazard played a significant role in the 2007/2008 credit crunch. In particular, bank traders subjected to asymmetric compensation structures have an incentive to take excessive risks even when the bank's shareholders would prefer prudent investment. Traders' incentives are shown to be unaffected by capital regulations, with the associated financial burden falling upon the taxpayer through deposit insurance or government bail-outs. Selected case studies further indicate that the phenomenon of “gambling traders” was widespread during the credit crunch, when high bonuses tempted bank employees to invest in risky subprime-backed securities. The intransparency of structured products and the inaccuracy of credit ratings contributed to the employees' ability to conceal the underlying risk from the banks' shareholders. The analysis points to an urgent need to reform compensation practices in the financial sector.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HC Economic History and Conditions|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Global Financial Crisis, 2008-2009, Credit, Stock exchanges, Floor traders (Finance), Speculation|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||Coventry|
|Number of Pages:||43|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|References:||Adrian, Tobias/Shin, Hyun S. (2008): “Liquidity and Leverage” (May 2008 Version); Journal of Financial Intermediation (forthcoming). Akerlof, George (1970): “The Market for 'Lemons': Quality Uncertainty and the Market Mechanism”; Quarterly Journal of Economics 84(3); pp. 488 – 500. Atzler, Elisabeth/Haake, Gregor (2008): “IKB vor turbulenter Hauptversammlung”; Financial Times Deutschland (FTD.de) August 27th, 2008; in: http://www.ftd.de/unternehmen/finanzdienstleister/:Nach_Verkauf_IKB_vor_turbulenter _Hauptversammlung/406213.html (05.09.08). Bartz, Tim/Atzler, Elisabeth (2007): “Germany's First Big Subprime Victim Rescued”; Financial Times (FT.com) August 2nd, 2007; in: http://www.ft.com/cms/s/0/819f88f2-40a4-11dc-9d0c-0000779fd2ac.html (05.09.08). Berman, Dennis K. (2007): “The Game: Sketchy Loans Abound; With Capital Plentiful, Debt Buyers Take Subprime Risks”; The Wall Street Journal Eastern Edition March 27th, 2007; p. C1. Bernanke, Ben S. (2007): “The Subprime Market”; Speech At The Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition May 17th, 2007; in: http://www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm (05.09.08). Brunnermeier, Markus K. (2008): “Deciphering the 2007-08 Liquidity and Credit Crunch”; Journal of Economic Perspectives (forthcoming). Buiter, Willem/Sibert, Anne (2007): “Bail-Out that will Damage Bank's Credibility”; Financial Times (FT.com) September 16th, 2007; in: http://www.ft.com/cms/s/0/760014ea-6475-11dc-90ea-0000779fd2ac.html (05.09.08). Chung, Joanna/Mishkin, Sarah (2008): “Ex-Bear Stearns Fund Managers on US Charges”; Financial Times (FT.com) June 20th, 2008; in: http://www.ft.com/cms/s/0/99d923c6-3e62-11dd-b16d-0000779fd2ac.html (05.09.08). Chung, Joanna/Scholtes, Saskia (2008): “IndyMac is the Latest Credit Turmoil Casualty”; Financial Times (FT.com) July 12th, 2008; in: http://www.ft.com/cms/s/3984698a-4fb6-11dd-b050-000077b07658.html (05.09.08). CMSA (2007): The Commercial Mortgage-Backed Securities Industry Factual Background July 2007; New York: Commercial Mortgage Securities Association; in: http://www.cmbs.org/uploadedFiles/CMSA_Site_Home/About_CMSA/Frequently_Ask ed_Questions/CMBS_Overview_jul07.pdf (05.09.08). CRL (2007): “IndyMac: What Went Wrong? How an “Alt-A” Leader Fueled its Growth with Unsound and Abusive Mortgage Lending”; CRL Report June 30th, 2007; Washington: Center for Responsible Lending, in: http://www.responsiblelending.org/pdfs/indymac_what_went_wrong.pdf (05.09.08). Economist (2007): “Credit and Blame”; The Economist September 6th, 2007. FAZ (2007): “Eine Kreditlinie wurde der IKB zum Verhängnis”; Frankfurter Allgemeine Zeitung (FAZ.net) July 30th, 2007. Federal Reserve (2006): “The October 2006 Senior Loan Officer Opinion Survey on Bank Lending Practices”; Washington: Board of Governors of the Federal Reserve System; in: http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200610/fullreport.pdf (05.09.08) - (2007): “The January 2007 Senior Loan Officer Opinion Survey on Bank Lending Practices”; Washington: Board of Governors of the Federal Reserve System; in: http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200701/fullreport.pdf (05.09.08) Foster, Dean P./Young, Peyton (2008): “The Hedge Fund Game: Incentives, Excess Returns, and Piggy-Backing”; Economics Working Papers 2008-W01, Nuffield College at the University of Oxford. FRBSF (2004):“House Prices and Fundamental Value”; FRBSF Economic Letter 2004-27; San Francisco: Federal Reserve Bank of San Francisco.7 Goodhart, Charles A./Huang, Haizhou (1999): “A Model of the Lender of Last Resort”; IMF Working Paper 99/39; Washington: International Monetary Fund. Guerrera, Francesco/White, Ben (2008): “Morgan Stanley in Rogue Trade Probe”; Financial Times (FT.com) June 18th, 2008; in: http://www.ft.com/cms/s/5cd36898-3d62-11dd-bbb5-0000779fd2ac (05.09.08). Heller, Daniel (2008): “Bank Bonuses: Three Ways to Reform the System”; Financial Times (FT.com) February 4th, 2008; in: http://www.ft.com/cms/s/e093a090- d263-11dc-8636-0000779fd2ac.html (05.09.08). Hellmann, Thomas F./Murdock, Kevin C./Stiglitz, Joseph E.(2000): “Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?”; American Economic Review 90(1); pp. 147 – 165. Keys, Benjamin J./Mukherjee, Tanmoy/Seru, Amit/Vig, Vikrant (2008): “Did Securitization Lead to Lax Screening? Evidence from Subprime Loans”; EFA 2008 Athens Meetings Paper, April 2008. Krugman, Paul (2007): “A Catastrophe Foretold”; The New York Times October 26th, 2007; in: http://www.nytimes.com/2007/10/26/opinion/26krugman.html?_r=2&ore (05.09.08). Lahart, Justin (2007): “Ahead of the Tape”; The Wall Street Journal Eastern Edition December 24th, 2007; p. C1. Laibson, David (1997): “Golden Eggs and Hyperbolic Discounting”; The Quarterly Journal of Economics 112(2); pp. 443 – 477. MBA (2007): Mortgage Bankers Association National Delinquency Survey December 6th, 2007; Washington: Mortgage Bankers Association; in: http://www.mbaa.org/NewsandMedia/PressCenter/58758.htm (05.09.08). Miller, Marcus (2008): “Deposit Rate Ceilings, Capital Requirements and Asset Quality”; Material for MSc course 'Topics in Global Finance', Spring 2008, University of Warwick. Mollenkamp, Carrick (2008): “Libor Fog: Bankers Cast Doubt On Key Rate Amid Crisis”; The Wall Street Journal April 16th, 2008; p. A1. Paletta, Damian/Enrich, David (2008): “Crisis Deepens as Big Bank Fails – IndyMac Seized in Largest Bust in Two Decades”; The Wall Street Journal July 12th, 2008; p. A1. Pearlstein, Steven (2007): “'No Money Down' falls flat”; The Washington Post March 14th, 2007; p. D1. Rajan, Raghuram (2008): “Bankers' Pay is Deeply Flawed”; Financial Times (FT.com) January 8th, 2008; in: http://www.ft.com/cms/s/0/18895deabe06- 11dc-8bc9-0000779fd2ac.html (05.09.08). RealtyTrac (2008): U.S. Foreclosure Market Report 2007; in: http://www.realtytrac.com (05.09.08). Robinson, Wendy/Moghadassi, Ramyar (2008): “Time is Right for a Change in Bonus Culture”; Financial Times (FT.com) August 11th, 2008; in: http://www.ft.com/cms/s/0/4a8c1298-66c5-11dd-808f-0000779fd18c.html (05.09.08). SEC Info (2006): IndyMac Bancorp Inc – Form 10Q – For 9/30/06; Washington: United States Securities and Exchange Commission; in: http://www.secinfo.com/dsvrp.vJXk.htm (05.09.08). - (2007): IndyMac Bancorp Inc – Form DEF 14A – For 4/26/07; Washington: United States Securities and Exchange Commission; in: http://www.secinfo.com/dsvR3.u1W3.htm (05.09.08). - (2008): IndyMac Bancorp Inc – Form 10Q – For 3/31/08; Washington: United States Securities and Exchange Commission; in: http://www.secinfo.com/dVut2.t668.htm#1stPage (05.09.08). Tett, Gillian/Davies, Paul J./Cohen, Norma (2007): “Structured Investment Vehicles' Role in Crisis”; Financial Times (FT.com) August 12th, 2007; in: http://www.ft.com/cms/s/0/8eebf016-48fd-11dc-b326-0000779fd2ac.html (05.09.08). Tripp vs. IndyMac (2008): Third Amended Class Action Complaint for Violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, Case No. 07-CV-1635- GW(VBK); Central District of California: United States District Court (also available in http://www.responsiblelending.org/pdfs/indy-tripp.pdf, 05.09.08). UBS (2007): UBS Financial Report 2006; Zurich: UBS AG; in: http://www.ubs.com/1/ShowMedia/investors/annualreporting? contentId=115920&name=fr06_e_final.pdf (05.09.08). - (2008a): Shareholder Report on UBS's Write-Downs April 18th, 2008; Zurich: UBS AG; in: http://www.ubs.com/1/ShowMedia/investors/shareholderreport? contentId=140333&name=080418ShareholderReport.pdf (05.09.08). - (2008b): UBS Annual Report 2007; Zurich: UBS AG; in: http://www.ubs.com/1/ShowMedia/investors/annualreporting? contentId=137530&name=AR07_SPR_EN.pdf (05.09.08). - (2008c): UBS Annual Reporting 2007 - Financial Statements; Zurich: UBS AG; in: http://www.ubs.com/1/e/investors/annual_reporting2007/fs2007/0006.html (05.09.08). White vs. Countrywide (2007): Class Action Complaint, Case No. CV-07-06094; United States District Court for the Central District of California – Western Division (also available in http://www.responsiblelending.org/pdfs/cwd-white.pdf, 05.09.08). Wilson, James (2008): “Investor Anger Deepens the Shadow Over IKB”; Financial Times (FT.com) March 28th, 2008; in: http://www.ft.com/cms/s/de4d7cf0- fc68-11dc-9229-000077b07658.html (05.09.08).|
Actions (login required)