papers

I’m generally fond of companies that find creative ways to access the public equity markets while not giving away all the “rights” that traditionally go to “owners” of “companies.” I mean, you want money, you ask people for money, you give them the terms that you need to give them to get the money: what is so sacred about shareholder voting rights?

At the same time though I’m a little skeptical of some of the reasons that private companies give for not wanting to go public. These seem to me to be basically two:

  • High-frequency-trading computers robots algorithms crash scary scary.
  • “If we go public our shareholders will force us to focus on quarterly earnings rather than the long-term good of the company.”

The first one, as you might notice from its grammar, seems ill-defined, though the fact that like every high-profile IPO this year has suffered from a computer glitch makes me think that it’s on to something. Something vague though. The second one: I mean, just don’t do that. What’s gonna happen to you if you manage for the long-term good of the company? Your stock will go down this quarter? Who cares? I thought you were in this for the long haul?

But they’ve got a point. Today in “shareholders are assholes,” here’s a delightful recent paper by three business professors about how stronger shareholder rights make companies more likely to manage earnings.1 As they point out, you could have two models of how strong public-shareholder rights (i.e. things like robust shareholder voting rights, weak anti-takeover provisions, etc.) affect corporate behavior:

  • Shareholders are good and will make companies do good things if they’re empowered,2 or
  • Shareholders are self-interested jerks and will make companies do bad things if it makes them more money.

There’s no particular reason to believe the first one but, y’know, it’s a hypothesis; it is also wrong: Read more »

While we’re celebrating successful bailouts I suppose it’s worth looking at this VoxEU post and related paper from two Swiss economists about the Fed’s Term Auction Facility, which provided short-term secured funding to U.S. banks who might otherwise have trouble getting such funding between December 2007 and March 2010. The authors ask the questions that we’ve seen asked before about a variety of bailouts, roughly:

  • Were the bailed-out banks worse than the non-bailed-out-banks, pre-bailouts?, and
  • Did they stay worse after the bailouts?

The answer to the first question is always yes, which you could figure out a priori.1 The answer to the second question is usually yes too. As I said about a previous study, “bank bailouts are designed to let banks keep getting up to their old tricks; if you wanted them to stop doing that you’d let them go bankrupt.”

But here it’s no, so, yay! The authors are looking specifically at interactions of TAF funding and liquidity risk; the idea is something like “a lot of banks did too much short-term funding of long-term assets, and when the funding markets blew up they were in trouble, and TAF was designed to save them, and it did, but did they learn any lessons?” And they did:

In words: Read more »

There are lots of things to worry about in the world and somewhere on the list is the fact that, while yields on agency mortgage-backed securities are really really really low, the rate you’ll pay for a new mortgage is only really low, so a couple of reallys have fallen off a truck somewhere. This worry isn’t at the top of my personal list – my mortgage rate is low enough I guess? – but it seems to make many other people’s list for two intersecting reasons. First, if the primary desire of Fed policy is to get people to buy houses, be rich, etc., and if its primary mechanism for doing so is buying MBS, then the inefficiency in transforming that mechanism into that desire is rather macroeconomically important and bad. Second, if money is coming out of the Fed and not ending up in homeowners’ pockets, that leaves only so many pockets it could be ending up in, and it is easy enough to observe that big banks (1) sit between the Fed and the homeowners and (2) have lots of pockets. So you can see how it might be fun to worry about money going to big multipocketed banks, because if it does, you get to be mad at them.

Anyway the New York Fed is doing a conference on it today; here’s the background paper and it’s really interesting; I recommend it, particularly if, like me, you have a hazy understanding of agency mortgage securitization. Everything in this space is predicated on somewhat fake math but their math is less fake than the simple spread math, which basically assumes that banks make a profit of:1

  • Annual Profit = Mortgage Rate – MBS Yield

By that math, as William Dudley points out, the spread was 30-50bps in the ’90s and early 2000s, but rose to 150bps in September and is around 120bps now. The Fed’s paper, on the other hand, walks through the actual securitization process to get cash flows into and out of the mortgage lender, and computes its profit (technically, profit plus non-interest-y costs like underwriting and hedging) as roughly:

  • Up-Front Profit = Sale Price Into MBS – Origination Price + 4 x (Mortgage Rate – MBS Coupon – GSE Guarantee Fee

Why 4? I dunno it’s in the paper.2 Anyway by this measure here is what has happened in the world: Read more »

Ben Bernanke gave another Augustinian give-us-QEn-but-not-yet* speech at Jackson Hole today and you could go read it but honestly why would you, you know what it says, which is “everything is bad, but not as bad as it could be, and we want to make it a bit better, but only once it’s gotten a bit worse.” Moving right along.

To Andrew Haldane’s speech, which is a treat! It is here and its title is “The dog and the frisbee,” so obviously he had Dealbreaker on his side right there. Haldane, the Bank of England’s financial-stability guy, basically argues that while the financial system is complex, it should be regulated simply – “As you do not fight fire with fire, you do not fight complexity with complexity” – just as a dog uses only elementary trigonometry and differential calculus to solve the complex and multivariate problem of catching a frisbee.**

Haldane’s main example of overcomplexity in regulation is risk-based capital regulation, in which the Basel accords have moved from simple leverage tests – common equity divided by total assets – to complicated tests where the numerator is made up of different tiers of capital and the denominator uses risk-weights that are largely driven by the bank’s own models of riskiness. One thing you could do is compare the performance of those measures in the recent crisis, so he did. Here is how Basel risk-based capital did:

That looks bad and also is bad, with no statistically significant difference between banks that blew up and banks that did not. This is just boring leverage: Read more »

A thing I used to do was go to companies and try to convince them to do various exotic flavors of share repurchase. This is in outline a thing that all bankers try to do – go to companies and (1) try to get them to do things and (2) if that’s going well, upsell to exotic flavors of those things – but the share repurchase angle is a challenging one because companies are universally and irremediably bad at share repurchase and everyone knows it. There are so many studies and they all basically say “you are dopes, stop buying back shares, you always buy at peaks and then sell at troughs, please for the love of God stop.” This is not really surprising: executives are by nature confident types, for one thing, so it’s a rare CEO who declines to buy his own stock on the grounds that it’s overpriced; for another, buyers buy things when they have lots of cash and feel rich, and shares are cheap when the issuer is running out of money and feels poor, so when the buyer and the issuer are the same you’ve sort of autocorrelated yourself into shittiness.*

Or so I thought. There is however an alternative explanation for why companies buy back shares that I have been giggling over for the last hour, and it is: because their managers are actually good at market timing and are sneakily insider trading for their own account through the corporation. Or so says Harvard Law professor Jesse Fried: Read more »

A thing I sometimes enjoy is reading research papers examining questions like:

  • if you are a bank, and you are likely to be bailed out, do you take more risks than a bank all on its lonesome, and
  • once you’ve been bailed out, what then?

We’ve looked at a BIS paper on international banks, which on certain assumptions found that (1) banks that were in fact bailed out took more risks pre-bailout than banks that weren’t (unsurprising) and (2) after the bailouts they pretty much stayed riskier (maybe surprising). And then there was a Fed paper about TARP banks, which on certain different assumptions found sort of the same results.

Anyway in the spirit of completism and also charts here is a Bank of Canada paper:

“Supported” banks seem to have been a wee bit less risky than regular banks before the crisis, and quite a bit less risky afterwards, somewhat contradicting those other findings. Here is a stab at an explanation: Read more »

  • 20 Aug 2012 at 6:02 PM

Cliff Asness’s Staff Built Him A Robot Warren Buffett

Do you want to invest like Warren Buffett? Sure you do. You know who will tell you how? Strangely, some guys at AQR:*

[W]e create a portfolio that tracks Buffett’s market exposure and active stock-selection themes, leveraged to the same active risk as Berkshire. We find that this systematic Buffett-style portfolio performs comparably to Berkshire Hathaway.

They acknowledge that Robo-Buffett doesn’t incur transaction costs that flesh-Buffett does (because R.-B. is as of yet just a simulation) but, that aside, “comparably” is an understatement:

Whee! Go Robo-Buffett! Who, intriguingly, looks a lot like … AQR: Read more »

Mutual funds are kind of weird in that they basically aren’t allowed to get paid for performance, so they charge investors a flat percentage of assets under management, so for mutual fund managers looking dapper on CNBC is often more profitable than sitting in your office researching stocks. Still – and perhaps perversely – performance does seem to attract assets, so if you run a mutual fund company there is quite a bit of value in trying to get your portfolio managers to pick the right stocks. There are various ways to do that: you could, for instance, ask them politely to do a good job, or yell at them when they don’t, or build them a treehouse. But, who are we kidding, basically there’s money: if you give them more money for picking good stocks, and less money for picking bad stocks, then you will probably attract good stock-pickers and encourage them to pick good stocks.

I enjoyed this paper immoderately: Read more »