Table of Contents

The Lehman Brothers Bankruptcy G: The Special Case of Derivatives

Rosalind Z. Wiggins, Yale University - Yale Program on Financial Stability
Andrew Metrick, Yale School of Management, National Bureau of Economic Research (NBER)

Insolvency after the 2005 Bankruptcy Reform

Stefania Albanesi, Federal Reserve Banks - Federal Reserve Bank of New York
Jaromir Nosal, Columbia University

Paternalism and Securities Regulation

Susanna Kim Ripken, Chapman University, The Dale E. Fowler School of Law

The Price of Complexity in Financial Networks

Stefano Battiston, University of Zurich - Department of Banking and Finance
Guido Caldarelli, IMT Alti Studi Lucca
Robert May, University of Oxford
Tarik Roukny, Université Libre de Bruxelles (ULB)
Joseph E. Stiglitz, Columbia Business School - Finance and Economics, National Bureau of Economic Research (NBER)

The Lehman Brothers Bankruptcy C: Managing the Balance Sheet Through the Use of Repo 105

Rosalind Z. Wiggins, Yale University - Yale Program on Financial Stability
Andrew Metrick, Yale School of Management, National Bureau of Economic Research (NBER)


REGULATION OF FINANCIAL INSTITUTIONS eJOURNAL

"The Lehman Brothers Bankruptcy G: The Special Case of Derivatives" Free Download
Yale Program on Financial Stability Case Study 2014-3G-V1

ROSALIND Z. WIGGINS, Yale University - Yale Program on Financial Stability
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ANDREW METRICK, Yale School of Management, National Bureau of Economic Research (NBER)
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When it filed for bankruptcy protection in September 2008, Lehman Brothers was an active participant in the derivatives market and was party to 906,000 derivative transactions of all types under 6,120 ISDA Master Agreements with an estimated notional value of $35 trillion. The majority of Lehman’s derivatives were bilateral agreements not traded on an exchange but in the over-the-counter (OTC) market. Because derivatives enjoyed an exemption from the automatic stay provisions of the U.S. Bankruptcy Code, parties to Lehman’s derivatives could seek resolution and self-protection without the guidance and restraint of the bankruptcy court. The rush of counterparties to novate Lehman’s derivative contracts, and the confusion following contracts that were terminated after its bankruptcy filing, added to the stress of the financial crisis in two ways: (1) loss of value to the Lehman estate and (2) exacerbating the contagion effects of the bankruptcy. This case explores the disposition of Lehman’s derivatives and its impacts.

"Insolvency after the 2005 Bankruptcy Reform" Fee Download
CEPR Discussion Paper No. DP10533

STEFANIA ALBANESI, Federal Reserve Banks - Federal Reserve Bank of New York
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JAROMIR NOSAL, Columbia University
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Using a comprehensive panel data set on U.S. households, we study the effects of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the most substantive reform of personal bankruptcy in the United States since the Bankruptcy Reform Act of 1978. The 2005 legislation introduced a means test based on income to establish eligibility for Chapter 7 bankruptcy and increased the administrative requirements to file, leading to a rise in the opportunity cost and, especially, the financial cost of filing for bankruptcy. We study the effects of the reform on bankruptcy, insolvency, and foreclosure. We find that the reform caused a permanent drop in the Chapter 7 bankruptcy rate relative to pre-reform levels, due to the rise in filing costs associated with the reform, which can be interpreted as resulting from liquidity constraints. We find that the decline in bankruptcy filings resulted in a rise in the rate and persistence of insolvency as well as an increase in the rate of foreclosure. We find no evidence of a link between the decline in bankruptcy and a rise in the number of individuals who are current on their debt. We document that these effects are concentrated at the bottom of the income distribution, suggesting that the income means tests introduced by BAPCPA did not serve as an effective screening device. We show that insolvency is associated with worse financial outcomes than bankruptcy, as insolvent individuals have less access to new lines of credit and display lower credit scores than individuals who file for bankruptcy. Since bankruptcy filings declined much more for low income individuals, our findings suggest that BAPCPA may have removed an important form of relief from financial distress for this group.

"Paternalism and Securities Regulation" Free Download
Stanford Journal of Law, Business, and Finance, Forthcoming

SUSANNA KIM RIPKEN, Chapman University, The Dale E. Fowler School of Law
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Federal securities regulation in the United States purports to take a distinctly non-paternalistic approach to the securities markets. The securities laws utilize disclosure, rather than heavy-handed substantive rules, to regulate securities transactions. Instead of flatly and paternalistically prohibiting certain transactions that might harm investors, disclosure rules require that investors receive material information so that they can decide for themselves whether to participate in risky transactions. The disclosure approach supports the free market and respects the autonomy of investors to make their own investment decisions. Although the federal securities regime appears to reflect an anti-paternalistic philosophy of regulation, the reality is that the securities laws have always contained significant elements of paternalism, and over the last eighty years, have become increasingly protectionist and paternalistic. Numerous modern securities rules prevent investors from taking on more risk than the government believes is good for them. As the securities markets grow increasingly more complex, it is critical to question whether greater levels of paternalism in the law are warranted.

In recent years, there has been much debate over how much regulation in the securities markets is too much. While some commentators call for a stronger regulatory hand to protect investors, others want to reduce regulation of potentially profitable investor activity. Few, however, engage in the broader discussion of the philosophical validity of paternalistic government intervention in investors’ lives and the securities markets. The idea that securities regulation is, can, and should be paternalistic is an important, but insufficiently theorized, aspect of securities law. This Article seeks to fill a gap in the literature by providing a closer analysis of the goals, validity, and drawbacks of paternalism in the law generally and in the securities markets in particular. It draws on inter-disciplinary materials to analyze the rationales for and resistance to paternalism. To the extent we believe some measure of legal paternalism is warranted, the Article recommends a substantive, tailored approach to developing and implementing paternalistic securities rules. Such rules must be supported by careful case-by-case analysis, not only to evaluate their efficiency, but also to understand their effect on individual autonomy, welfare, and the public good.

"The Price of Complexity in Financial Networks" Free Download

STEFANO BATTISTON, University of Zurich - Department of Banking and Finance
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GUIDO CALDARELLI, IMT Alti Studi Lucca
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ROBERT MAY, University of Oxford
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TARIK ROUKNY, Université Libre de Bruxelles (ULB)
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JOSEPH E. STIGLITZ, Columbia Business School - Finance and Economics, National Bureau of Economic Research (NBER)
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Financial institutions form multi-layer networks of contracts among each other and exposures to common assets. As a result, the default probability of one institution depends on the default probability of all the other institutions in the network. Here, we show how small errors on the knowledge of the network of contracts can lead to large errors on the probability of systemic defaults. From the point of view of financial regulators, our findings show that the complexity of financial instruments and the complexity of networks of contracts may decrease our ability to estimate and mitigate systemic risk.

"The Lehman Brothers Bankruptcy C: Managing the Balance Sheet Through the Use of Repo 105" Free Download
Yale Program on Financial Stability Case Study 2014-3C-V1

ROSALIND Z. WIGGINS, Yale University - Yale Program on Financial Stability
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ANDREW METRICK, Yale School of Management, National Bureau of Economic Research (NBER)
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Anton R. Valukas, the Lehman Brothers court-appointed bankruptcy examiner, produced a 2,200-page report detailing possible claims that the estate might pursue, and he identified several, from company officers to its independent auditors. The most startling revelation of the report, however, was that, during its last year, Lehman had relied heavily on an unusual financing transaction — Repo 105. The examiner concluded that Lehman’s aggressive use of Repo 105 transactions enabled it to remove up to $50 billion of assets from its balance sheet at quarter-end and to manipulate its leverage ratio so that it could report more favorable numbers. This case considers in-depth Lehman’s questionable use of Repo 105 transactions and its impact.

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BANKING & FINANCIAL INSTITUTIONS EJOURNALS

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Social Science Electronic Publishing (SSEP), Inc., Harvard Business School, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
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Regulation of Financial Institutions eJournal

EDWARD I. ALTMAN
Max L. Heine Professor of Finance and Vice Director, New York University (NYU) - Salomon Center, Max L. Heine Professor of Finance, New York University (NYU) - Department of Finance

DENNIS R. CAPOZZA
Professor of Finance and Dykema Professor of Business Administration, University of Michigan, Stephen M. Ross School of Business

DONALD CHEW
Morgan Stanley Investment Management

J. DAVID CUMMINS
Joseph E. Boettner Professor, Temple University - Risk Management & Insurance & Actuarial Science

DOUGLAS W. DIAMOND
Merton H. Miller Distinguished Service Professor of Finance, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER)

EUGENE F. FAMA
Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago - Finance

STEPHEN FIGLEWSKI
Professor of Finance, New York University - Stern School of Business

STUART I. GREENBAUM
Bank of America Professor of Managerial Leadership, Washington University in St. Louis - Olin Business School

MICHAEL C. JENSEN
Co-Founder, Chairman, Managing Director and Integrity Officer, Social Science Electronic Publishing (SSEP), Inc., Jesse Isidor Straus Professor of Business Administration, Emeritus, Harvard Business School, Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

JONATHAN M. KARPOFF
Washington Mutual Endowed Chair in Innovation Professor of Finance, University of Washington - Michael G. Foster School of Business

KENNETH LEHN
Professor of Business Administration, University of Pittsburgh - Finance Group

STANLEY R. PLISKA
University of Illinois at Chicago - Department of Finance

CHARLES I. PLOSSER
President, Federal Reserve Bank of Philadelphia, National Bureau of Economic Research (NBER)

KATHERINE SCHIPPER
Duke University - Fuqua School of Business

ALAN SCHWARTZ
Sterling Professor of Law, Yale Law School

G. WILLIAM SCHWERT
Distinguished University Professor of Finance and Statistics, University of Rochester - Simon Business School, National Bureau of Economic Research (NBER)

RENE M. STULZ
Everett D. Reese Chair of Banking and Monetary Economics, Ohio State University (OSU) - Department of Finance, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

ROSS L. WATTS
Erwin H. Schell Professor of Management, Massachusetts Institute of Technology (MIT) - Sloan School of Management