Complex Securities and Underwriter Reputation: Do Reputable Underwriters Produce Better Securities?
John M. Griffin
University of Texas at Austin - Department of Finance
University of Texas-Austin
University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics
August 15, 2013
Conventional wisdom suggests that high reputation banks will generally produce good securities to maintain their long-run reputation. Using a simple model of reputation and complexity, we show that when complex securities are highly profitable, even a high reputation bank may forgo monitoring. Specialists within the high reputation bank will then produce assets that make excess profits for themselves and the bank during boom periods but severely underperform during market downturns. We examine this and other basic features of the market using a unique sample of $8 trillion dollars of CLO, MBS, ABS, and structured finance CDOs issued between 2000 and 2010. Contrary to the conventional view, securities issued by more reputable banks did not outperform, but rather exhibited ten percent more capital in default and greater rating deterioration. The underperformance is present both because high reputation underwriters issued more securities in the poorest performing parts of structured finance and because within the MBS, ABS, and CDO markets they issued poorly performing securities. Additionally, across all high reputation underwriters, we find few who appear to be "commitment-type" underwriters that produced more profitable structured finance securities for customers.
Number of Pages in PDF File: 108
Keywords: complex securities, reputation, CDO, ABS, MBS, CLOworking papers series
Date posted: July 1, 2012 ; Last revised: August 20, 2013
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