Michael N Simkovic Copyright (c) 2011 All rights reserved. http://works.bepress.com/michael_simkovic Recent documents in Michael N Simkovic en-us Tue, 16 Aug 2011 01:48:29 PDT 3600 Is competition the solution or the problem? An analysis of U.S. mortgage securitization http://works.bepress.com/michael_simkovic/6 http://works.bepress.com/michael_simkovic/6 Sun, 14 Aug 2011 19:24:09 PDT This article’s original contribution to the literature about the causes of the U.S. mortgage crisis of the late 2000s is to analyze two important causes that have thus far only been discussed in passing. First, this article provides evidence that fragmentation of the securitization market in the mid-2000s and competition between mortgage securitizers undermined securitizers’ ability to control originators, and that such competition led to a race to the bottom on underwriting standards. Second, this article provides evidence of a shift in market power away from securitizers and toward originators during the mid-2000s, and argues that this shift in power eroded securitizers’ ability to enforce discipline and maintain prudent underwriting standards.

This article provides evidence that Government Sponsored Enterprises (“GSEs”) were more successful than other mortgage securitizers at maintaining prudent underwriting. Underwriting means preventing losses at the front end rather than shifting losses after the fact by basing loan approval decisions and lending terms on data-driven predictions of the likelihood of default and severity of losses in the event of default. The GSEs success is probably in part because of the large size and therefore large market power of the GSEs.

This article explains another reason why a higher degree of government control may be associated with more conservative mortgage underwriting: incentives. Whereas private investors and managers capture most of the upside of mortgage lending, taxpayers bear most of the downside risk because of limited liability, public safety nets, and the cyclicality of default risk. This article discusses the effects of longstanding public subsidies of private financial institutions through safety nets and tax policy, as well as “bailouts” during times of crisis. This article also reviews evidence from loan performance and lobbying activity consistent with the view that government often prefers more conservative underwriting, while private financial institutions seek to take greater risks.

These findings have profound implications for post-crisis reform of U.S. residential mortgage finance.

]]> Michael N. Simkovic Economics Housing Law Law and Economics Law and Society Legislation Politics Secured Transactions Securities Law Leveraged Buyout Bankruptcies, the Problem of Hindsight Bias, and the Credit Default Swap Solution http://works.bepress.com/michael_simkovic/5 http://works.bepress.com/michael_simkovic/5 Sat, 28 Aug 2010 22:24:05 PDT Michael N. Simkovic et al. Law and Economics Economics Banking and Finance Bankruptcy Law Secret liens and the financial crisis of 2008 http://works.bepress.com/michael_simkovic/4 http://works.bepress.com/michael_simkovic/4 Thu, 26 Feb 2009 12:44:00 PST This article explains the roots of financial crises in one of the oldest and most fundamental problems of commercial law: hidden leverage. Common law courts wrestled with this problem for centuries and developed a time-tested solution: the doctrine of secret liens. If the debtor becomes insolvent, the doctrine of secret liens punishes secret lien holders by subordinating their claims to those of other creditors. In other words, by overriding privately negotiated payment priorities, the doctrine of secret liens creates incentives for transparency. This article argues that legal changes over the last 80 years eroded the doctrine of secret liens, and thereby led to the financial crisis. Due to these legal changes, complex and opaque financial products received the highest priority in bankruptcy, and creditors' incentives were therefore to structure transactions using these favored financial products. The opaque credit environment that resulted permitted debtors-particularly investment banks-to hide the extent of their leverage, to the detriment of all creditors. This article argues that Congress can prevent future financial crises by restoring the doctrine of secret liens, or by adopting a modernized regulatory regime built on the doctrine of secret liens' fundamental insight-that creditors should be compelled to disclose their claims in exchange for payment priority.

]]> Michael N. Simkovic Banking and Finance Bankruptcy Law Commercial Law Economics Law and Economics Secured Transactions The Effect of the 2005 Bankruptcy Reforms on Credit Card Company Profits and Prices (2) http://works.bepress.com/michael_simkovic/3 http://works.bepress.com/michael_simkovic/3 Thu, 11 Sep 2008 08:46:32 PDT The U.S. Bankruptcy code changed dramatically with the passage of The Bankruptcy Abuse Prevention and Consumer Protection Act Of 2005. This act increased the costs and decreased the benefits of bankruptcy to consumers. Supporters of the law claimed that it would benefit consumers as well as creditors, because reducing the losses faced by creditors would lower the cost of credit to consumers. Critics of the law depicted it as special interest legislation designed to profit credit card companies at the expense of consumers. This study tests whether the 2005 Bankruptcy Reform: (1) reduced the number of bankruptcies; (2) reduced credit card company losses; (3) lowered the cost to consumers of credit card debt; and (4) increased credit card company profits. The data suggests that although bankruptcies and credit card company losses decreased, and credit card companies achieved record profits, the cost to consumers of credit card debt actually increased. In other words the 2005 bankruptcy reforms profited credit card companies at consumers’ expense.

]]> Michael N. Simkovic Law and Economics Economics Banking and Finance Bankruptcy Law Legislation Consumer Protection Law Trade Regulation Commercial Law Politics Public Law and Legal Theory Contracts Law and Society The Effect of 2005 Bankruptcy Reform on Credit Card Industry Profits and Prices http://works.bepress.com/michael_simkovic/2 http://works.bepress.com/michael_simkovic/2 Sun, 20 Jul 2008 20:52:21 PDT The U.S. Bankruptcy code changed dramatically with the passage of The Bankruptcy Abuse Prevention and Consumer Protection Act Of 2005. This act increased the costs and decreased the benefits of bankruptcy to consumers. Supporters of the law claimed that it would benefit consumers as well as creditors, because reducing the losses faced by creditors would lower the cost of credit to consumers. Critics of the law depicted it as special interest legislation designed to profit credit card companies at the expense of consumers. This study tests whether the 2005 Bankruptcy Reform: (1) reduced the number of bankruptcies; (2) reduced credit card company losses; (3) lowered the cost to consumers of credit card debt; and (4) increased credit card company profits. The data suggests that although bankruptcies and credit card company losses decreased, and credit card companies achieved record profits, the cost to consumers of credit card debt actually increased. In other words the 2005 bankruptcy reforms profited credit card companies at consumers’ expense.

]]> Michael N. Simkovic Antitrust Banking and Finance Bankruptcy Law Consumer Protection Law Economics Law and Economics Legislation The Effect of Enhanced Disclosure on Open Market Stock Repurchases http://works.bepress.com/michael_simkovic/1 http://works.bepress.com/michael_simkovic/1 Sat, 15 Mar 2008 23:52:25 PDT Publicly traded companies distribute cash to shareholders either through dividends or through anonymous repurchases of the companies’ own stock on the open market. Companies must announce a repurchase authorization, but do not actually have to repurchase any stock, and until recently did not have to disclose whether or not they were in fact repurchasing any stock. Scholars and regulators noticed that companies frequently announced repurchases but then appeared not to complete them. They feared that such announcements might be used by insiders to exploit public investors. To reduce opportunities for exploitive behavior, the SEC required that companies disclose their repurchase activity in their quarterly filings beginning in January 2004. This paper tracks 365 repurchase programs announced in 2004 and finds that since the SEC disclosure requirement went into effect, companies are more likely to complete their announced repurchases and do so within a shorter time period after the repurchase announcement.

]]> Michael N. Simkovic Banking and Finance Corporations Economics Law and Economics Securities Law