Essays in banking and macroeconomics
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Abstract
My dissertation consists of three essays covering aspects of macroeconomics and financial economics. In “Settling Up on Securitization: Principles, Payoffs, and Precedent,” cowritten with Prof. King, we investigate the subprime mortgage-backed securities of the 2000s through the lens of Federal Housing Finance Agency lawsuits resulting in settlements and trials recovering billions of dollars to Fannie Mae and Freddie Mac, which had invested in these securities. We find that in some cases the GSE investors received compensation exceeding the economic damages they had suffered on securities purchased, that this was in part motivated by state securities law rather than federal, and that the FHFA v. Nomura case brought new securities law precedent unfavorable to defendants based on a macroeconomic argument. In “How Do You Solve a Problem Like Nomura? Remedies for Securities Fraud with Market-level Consequences,” I use discrete and continuous action models to examine incentives and market outcomes of the Nomura policy change in a securities market with multiple interacting issuers choose the quality of securities they issue. Its main conclusion is that, post-Nomura, issuers improve underwriting quality when poor underwriting brings negative macroeconomic effects, improving outcomes for investors and issuers. However, this conclusion is sensitive to market structure and investors’ information sets. While the precedent addresses information frictions, it does not resolve other externality problems leading to degraded underwriting quality. In “Heterogeneity in an Infinite-horizon Banking Model” I take an off-the-shelf model of an economy with a banking system featuring endogenous bank runs and extend it to investigate the presence of multiple banks with distinct histories and prospects. I employ perfect-foresight analysis to examine the effect of differential productivity shocks on the economy’s banks, spillovers between banking systems, and circumstances where bank runs are possible and analyze intermediation patterns among banks at steady state. The major result is that heterogeneity between banks increases the threshold productivity shock permitting bank runs but can lead to protracted income divergence between consumers associated with different banks.