Joseph Mason - Academia.edu (original) (raw)
Papers by Joseph Mason
SSRN Electronic Journal, 2002
Page 1. Too-big-to-fail, Government Bailouts, and Managerial Incentives: The Case of Reconstructi... more Page 1. Too-big-to-fail, Government Bailouts, and Managerial Incentives: The Case of Reconstruction Finance Corporation Assistance to the Railroad Industry during the Great Depression Joseph R. Mason Assistant Professor ...
SSRN Electronic Journal, 2002
Literature to date has identified three main aspects of liquidation time: firm size, asset specif... more Literature to date has identified three main aspects of liquidation time: firm size, asset specificity, and industry concentration. The present paper unifies the theory behind these three aspects of bankruptcy costs by treating them as components of a broader option valuation problem faced by the liquidating trustee. In the options valuation framework, at time t the trustee may choose to 1) liquidate at current asset values and incur a known loss, or 2) hold until the next period t+1 at a positive opportunity cost. The trustee may not sell in the current period if expected asset price growth is sufficiently large. Expectations of asset price growth are based on previous asset price growth and asset price volatility, which are related to firm size, asset specificity, and industry concentration. Testing the hypothesized asset price relationships on FDIC failed bank liquidation data with OLS, three-stage least squares, and duration specifications yields the appropriate results. Furthermore, it appears that liquidation time alone can be used as an effective second order proxy for asset value growth where market value estimates are unavailable.
SSRN Electronic Journal, 2000
ABSTRACT Many have attempted to distill lessons on combating economic crises from the experiences... more ABSTRACT Many have attempted to distill lessons on combating economic crises from the experiences of the US Reconstruction Finance Corporation (RFC) during the 1930s. However, the resulting policies have been subject to widespread doubts and criticisms. Many economic historians doubt RFC assistance to financial intermediaries and commercial & industrial firms contributed a great deal to stabilizing the US economy during the Great Depression. RFC assistance probably did not, therefore, form a significant basis for the general economic recovery to follow. The present essay does not dispute that point. However, between 1932 and 1937, the RFC experimented with a wide variety of programs targeted toward resolving systemic distress. It did so by attempting to stimulate credit and capital market activity through acting as a lender of last resort, recapitalizing the banking industry, and providing direct credit to commercial and industrial enterprises.
The authors thank Nobu Hibara for his comments and for his help assembling data on Japanese banks.
SSRN Electronic Journal, 1999
ABSTRACT The present paper examines bankrupt firm liquidation data with duration, OLS and three-s... more ABSTRACT The present paper examines bankrupt firm liquidation data with duration, OLS and three-stage least squares models to estimate the costs and benefits of bankruptcy liquidation delays. The paper uses Federal Deposit Insurance Corporation data on failed banks to estimate net present value maximizing liquidation strategies while keeping holdout effects, forum shopping, and debt renegotiation constant. Lengthy liquidations can impose high opportunity costs, but these costs can be substantially mitigated by asset appreciation over the liquidation period. Therefore it is important to simultaneously weigh the costs and benefits of delay. The NPV-maximizing liquidation strategy may therefore not always be the fastest.
SSRN Electronic Journal, 2009
ABSTRACT Financial innovation is inextricably tied to asymmetric information and therefore sets t... more ABSTRACT Financial innovation is inextricably tied to asymmetric information and therefore sets the stage for financial crises. Over history, every truly meaningful crisis has had elements of asymmetric information, particularly affecting innovative financial instruments that are primary market liabilities. But financial innovation, by definition, occurs outside the regulated financial sector. Indeed, that is often the point of financial innovation! Hence, limiting regulators' scope of supervision to one narrow legally-defined sector of institutions sets a natural stage for regulatory arbitrage and crises. In such a system, crisis will always "surprise" supervisors, for whom financial innovations outside their narrow legally-defined charge do not exist. Everything will look like systemic risk, merely because banks reside in a financial system! Today, off-balance sheet structured finance-based funding, the regulatory approval of banks' use of credit default swaps for hedging capital needs, and the preponderance of non-bank subsidiaries in bank holding companies after Gramm-Leach-Bliley led to multiple sources of unrecognized risks that took regulators by "surprise," not because they were unknown but because regulators refused to look outside their narrow charges to see the wider financial system. Similarly, however, any attempt to change regulations will inextricably affect other non- or differently-regulated institutions, thereby leading to "unintended" (not unavoidable) consequences.
SSRN Electronic Journal, 2008
... Of course, prior to the recent difficulties the industry was small and Moody's was still... more ... Of course, prior to the recent difficulties the industry was small and Moody's was still able to maintain an aggressive stance on clarity and accuracy. Page 160. Cliff Risk and the Credit Crisis 147 retain that piece under the aegis of having skin in the game will change nothing. ...
SSRN Electronic Journal, 2007
SSRN Electronic Journal, 2007
The mortgage-backed securities (MBS) market has experienced significant changes over the past cou... more The mortgage-backed securities (MBS) market has experienced significant changes over the past couple of years. Non-agency ("private label") securities, which are not guaranteed by the government or the government sponsored enterprises, now account for the majority of MBS issued. In this report, we review the rise of collateralized debt obligations (CDOs), the relaxation of lending standards, and the implementation of loan mitigation practices. We analyze whether these structural changes have created an environment of understated risk to investors of MBS. We also measure the efficacy of ratings agencies when it comes to assessing market risk rather than credit risk. Our findings imply that even investment grade rated CDOs will experience significant losses if home prices depreciate. We conclude by providing several policy implications of our findings.
The Journal of Economic History, 2001
This paper presents a detailed accounting of the sources of African-American economic progress in... more This paper presents a detailed accounting of the sources of African-American economic progress in the labor market over the twentieth century. We examine the received literature and demonstrate the sensitivity of conclusions stated in it to choices of samples used to measure wages and to specifications of earnings functions. We present a quantitative assessment of the contributions of migration, schooling choices, schooling quality, and social activism to both absolute levels and relative levels of African-American earnings.
SSRN Electronic Journal, 2009
ABSTRACT Recent history is rife with examples of servicer problems and failures, resplendent with... more ABSTRACT Recent history is rife with examples of servicer problems and failures, resplendent with detail on best - and worst - practices. The industry has been through profitable highs and predatory lows, over time reacting to increased competition with greater efficiency and, where sensible, increased concentration reflective of scale economies in processing and knowledge. While the value of good mortgage (and all consumer loan) servicing is reflected in asset- and mortgage-backed security spreads, structurally-required credit enhancements, defaults and roll rates, and modification outcomes, that value lies primarily in processes and knowledge. Servicing is nothing if not a service industry, motivating borrowers to pay the loans under the servicer's own management even when the borrower cannot afford to pay others. Such processes are the basis of managing initial defaults and getting borrowers back on track, whether that is through managing to roll the borrower back to current organically, or helping the borrower realign their finances in a modification. Even in foreclosure, there is value to be retained within the legal environment, among real estate professionals and vendors, and even with the foreclosed borrower. But intensively customer service-based enterprises such as servicing are hard to evaluate quantitatively, so that proving a servicer's value is difficult even in the best business environment. Unfortunately, today's is not the best business environment, so proving servicer value has now become crucial to not only servicer survival, but the survival of the market as a whole. Regulators can therefore do a great service to both the industry and borrowers in today's financial climate by insisting that servicers report adequate information to assess not only the success of major modification initiatives, but also performance overall. The increased investor dependence on third-party servicing that has accompanied securitization necessitates substantial improvements to investor reporting in order to support appropriate administration and, where helpful, modification of consumer loans in both the private and public interest. Without information, even the most highly subsidized modification policies are bound to fail.
SSRN Electronic Journal, 2009
SSRN Electronic Journal, 2011
American Economic Review, 2003
The consequences of bank distress for the economy during the Depression remain an area of unresol... more The consequences of bank distress for the economy during the Depression remain an area of unresolved controversy. Since John M. Keynes (1931) and Irving Fisher (1933), mac-* Calomiris: Graduate School of Business,
American Economic Review, 2003
We assemble bank-level and other data for Fed member banks to model determinants of bank failure.... more We assemble bank-level and other data for Fed member banks to model determinants of bank failure. Fundamentals explain bank failure risk well. The first two Friedman-Schwartz crises are not associated with positive unexplained residual failure risk, or increased importance of bank illiquidity for forecasting failure. The third Friedman-Schwartz crisis is more ambiguous, but increased residual failure risk is small in the aggregate. The final crisis (early 1933) saw a large unexplained increase in bank failure risk. Local contagion and illiquidity may have played a role in pre-1933 bank failures, even though those effects were not large in their aggregate impact.
Pacific-Basin Finance Journal, 2008
This study examines herding behavior in dual-listed Chinese A-share and B-share stocks. We find e... more This study examines herding behavior in dual-listed Chinese A-share and B-share stocks. We find evidence of herding within both the Shanghai and Shenzhen A-share markets that are dominated by domestic individual investors, and also within both B-share markets, in which foreign ...
Journal of Financial Services Research, 2004
This paper explores the motivations and desirability of off-balance-sheet financing of credit car... more This paper explores the motivations and desirability of off-balance-sheet financing of credit card receivables by banks. We explore three related issues: the degree to which securitizations result in the transfer of risk out of the originating bank, the extent to which securitization permits banks to economize on capital by avoiding regulatory minimum capital requirements, and whether banks' avoidance of minimum capital regulation through securitization with implicit recourse has been undesirable from a regulatory standpoint. We show that this intermediation structure could be motivated either by desirable efficient contracting in the presence of asymmetric information or by undesirable safety net abuse. We find that securitization results in some transfer of risk out of the originating bank but that risk remains in the securitizing bank as a result of implicit recourse. Clearly, then, securitization with implicit recourse provides an important means of avoiding minimum capital requirements. We also find, however, that securitizing banks set their capital relative to managed assets according to market perceptions of their risk and seem not to be motivated by maximizing implicit subsidies relating to the government safety net when managing their risk. Thus, the evidence is more consistent with the efficient contracting view of securitization with implicit recourse than with the safety net abuse view. Concerns expressed by policymakers about this form of capital requirement avoidance appear to be overstated.
Journal of Banking & Finance, 2004
The present paper uses data from revolving credit card securitizations to show that, conditional ... more The present paper uses data from revolving credit card securitizations to show that, conditional on being in a position where implicit recourse has become necessary and actually providing that recourse, recourse to securitized debt may benefit short-and longterm stock returns, and long-term operating performance of sponsors. The paper suggests that this result may come about because those sponsors providing the recourse do not seem to be extreme default or insolvency risks. However, sponsors providing recourse do experience an abnormal delay in their normal issuance cycle around the event. Hence, it appears that the asset-backed securities market is like the commercial paper market, where a firm's ability to issue is directly correlated with credit quality. Therefore, although in violation of regulatory guidelines and FASB140, recourse may have beneficial effects for sponsors by revealing that the shocks that made recourse necessary are transitory. Commercial banks have a strong incentive to sell assets in order to increase liquidity, reduce interest rate risk, and avoid burdensome regulations. However, most bank assets are high asymmetric information financial instruments and, as a result, are fundamentally illiquid. Hence, commercial banks have become increasingly reliant upon securitization as a means of selling assets. Business strategies that revolve around securitization are accompanied by a host of incentive conflicts. At various times during the 1990s, securitization has been associated with financial difficulties arising from fictitious financial ratios (gain-on-sale provisions), understated leverage (Enron), and hidden risks (Enron, PNC, and other commercial banks). The present paper concerns itself with the last of these, that is, the propensity for securitizations to mask risks to the sponsor, 1 whether the sponsor is a bank originating loans or a nonbank firm posting other collateral for securitization (Calomiris and Mason 2003; Jones 2000). Risks often remain with the sponsor because securitization-and the removal of assets from the sponsor's balance sheet-relies on a "true sale" to a legally remote third party. If the assets are not truly sold or the sale is not to a legally defined third party, the assets must be reported on the sponsor's balance sheet. One important condition that determines whether a true sale has taken place is whether the sale agreement provides recourse, or performance guarantees, to the buyer. If recourse terms are present, the assets pose a contingent risk to the seller which, under FASB140, prohibits the removal of the assets from the seller's balance sheet. While few loan sales contracts contain explicit terms that provide recourse, many loan sales (particularly those involving revolving collateral like credit card loans) hinge upon an implicit understanding that recourse may be provided by the sponsor. Such understandings exist
SSRN Electronic Journal, 2002
Page 1. Too-big-to-fail, Government Bailouts, and Managerial Incentives: The Case of Reconstructi... more Page 1. Too-big-to-fail, Government Bailouts, and Managerial Incentives: The Case of Reconstruction Finance Corporation Assistance to the Railroad Industry during the Great Depression Joseph R. Mason Assistant Professor ...
SSRN Electronic Journal, 2002
Literature to date has identified three main aspects of liquidation time: firm size, asset specif... more Literature to date has identified three main aspects of liquidation time: firm size, asset specificity, and industry concentration. The present paper unifies the theory behind these three aspects of bankruptcy costs by treating them as components of a broader option valuation problem faced by the liquidating trustee. In the options valuation framework, at time t the trustee may choose to 1) liquidate at current asset values and incur a known loss, or 2) hold until the next period t+1 at a positive opportunity cost. The trustee may not sell in the current period if expected asset price growth is sufficiently large. Expectations of asset price growth are based on previous asset price growth and asset price volatility, which are related to firm size, asset specificity, and industry concentration. Testing the hypothesized asset price relationships on FDIC failed bank liquidation data with OLS, three-stage least squares, and duration specifications yields the appropriate results. Furthermore, it appears that liquidation time alone can be used as an effective second order proxy for asset value growth where market value estimates are unavailable.
SSRN Electronic Journal, 2000
ABSTRACT Many have attempted to distill lessons on combating economic crises from the experiences... more ABSTRACT Many have attempted to distill lessons on combating economic crises from the experiences of the US Reconstruction Finance Corporation (RFC) during the 1930s. However, the resulting policies have been subject to widespread doubts and criticisms. Many economic historians doubt RFC assistance to financial intermediaries and commercial & industrial firms contributed a great deal to stabilizing the US economy during the Great Depression. RFC assistance probably did not, therefore, form a significant basis for the general economic recovery to follow. The present essay does not dispute that point. However, between 1932 and 1937, the RFC experimented with a wide variety of programs targeted toward resolving systemic distress. It did so by attempting to stimulate credit and capital market activity through acting as a lender of last resort, recapitalizing the banking industry, and providing direct credit to commercial and industrial enterprises.
The authors thank Nobu Hibara for his comments and for his help assembling data on Japanese banks.
SSRN Electronic Journal, 1999
ABSTRACT The present paper examines bankrupt firm liquidation data with duration, OLS and three-s... more ABSTRACT The present paper examines bankrupt firm liquidation data with duration, OLS and three-stage least squares models to estimate the costs and benefits of bankruptcy liquidation delays. The paper uses Federal Deposit Insurance Corporation data on failed banks to estimate net present value maximizing liquidation strategies while keeping holdout effects, forum shopping, and debt renegotiation constant. Lengthy liquidations can impose high opportunity costs, but these costs can be substantially mitigated by asset appreciation over the liquidation period. Therefore it is important to simultaneously weigh the costs and benefits of delay. The NPV-maximizing liquidation strategy may therefore not always be the fastest.
SSRN Electronic Journal, 2009
ABSTRACT Financial innovation is inextricably tied to asymmetric information and therefore sets t... more ABSTRACT Financial innovation is inextricably tied to asymmetric information and therefore sets the stage for financial crises. Over history, every truly meaningful crisis has had elements of asymmetric information, particularly affecting innovative financial instruments that are primary market liabilities. But financial innovation, by definition, occurs outside the regulated financial sector. Indeed, that is often the point of financial innovation! Hence, limiting regulators' scope of supervision to one narrow legally-defined sector of institutions sets a natural stage for regulatory arbitrage and crises. In such a system, crisis will always "surprise" supervisors, for whom financial innovations outside their narrow legally-defined charge do not exist. Everything will look like systemic risk, merely because banks reside in a financial system! Today, off-balance sheet structured finance-based funding, the regulatory approval of banks' use of credit default swaps for hedging capital needs, and the preponderance of non-bank subsidiaries in bank holding companies after Gramm-Leach-Bliley led to multiple sources of unrecognized risks that took regulators by "surprise," not because they were unknown but because regulators refused to look outside their narrow charges to see the wider financial system. Similarly, however, any attempt to change regulations will inextricably affect other non- or differently-regulated institutions, thereby leading to "unintended" (not unavoidable) consequences.
SSRN Electronic Journal, 2008
... Of course, prior to the recent difficulties the industry was small and Moody's was still... more ... Of course, prior to the recent difficulties the industry was small and Moody's was still able to maintain an aggressive stance on clarity and accuracy. Page 160. Cliff Risk and the Credit Crisis 147 retain that piece under the aegis of having skin in the game will change nothing. ...
SSRN Electronic Journal, 2007
SSRN Electronic Journal, 2007
The mortgage-backed securities (MBS) market has experienced significant changes over the past cou... more The mortgage-backed securities (MBS) market has experienced significant changes over the past couple of years. Non-agency ("private label") securities, which are not guaranteed by the government or the government sponsored enterprises, now account for the majority of MBS issued. In this report, we review the rise of collateralized debt obligations (CDOs), the relaxation of lending standards, and the implementation of loan mitigation practices. We analyze whether these structural changes have created an environment of understated risk to investors of MBS. We also measure the efficacy of ratings agencies when it comes to assessing market risk rather than credit risk. Our findings imply that even investment grade rated CDOs will experience significant losses if home prices depreciate. We conclude by providing several policy implications of our findings.
The Journal of Economic History, 2001
This paper presents a detailed accounting of the sources of African-American economic progress in... more This paper presents a detailed accounting of the sources of African-American economic progress in the labor market over the twentieth century. We examine the received literature and demonstrate the sensitivity of conclusions stated in it to choices of samples used to measure wages and to specifications of earnings functions. We present a quantitative assessment of the contributions of migration, schooling choices, schooling quality, and social activism to both absolute levels and relative levels of African-American earnings.
SSRN Electronic Journal, 2009
ABSTRACT Recent history is rife with examples of servicer problems and failures, resplendent with... more ABSTRACT Recent history is rife with examples of servicer problems and failures, resplendent with detail on best - and worst - practices. The industry has been through profitable highs and predatory lows, over time reacting to increased competition with greater efficiency and, where sensible, increased concentration reflective of scale economies in processing and knowledge. While the value of good mortgage (and all consumer loan) servicing is reflected in asset- and mortgage-backed security spreads, structurally-required credit enhancements, defaults and roll rates, and modification outcomes, that value lies primarily in processes and knowledge. Servicing is nothing if not a service industry, motivating borrowers to pay the loans under the servicer's own management even when the borrower cannot afford to pay others. Such processes are the basis of managing initial defaults and getting borrowers back on track, whether that is through managing to roll the borrower back to current organically, or helping the borrower realign their finances in a modification. Even in foreclosure, there is value to be retained within the legal environment, among real estate professionals and vendors, and even with the foreclosed borrower. But intensively customer service-based enterprises such as servicing are hard to evaluate quantitatively, so that proving a servicer's value is difficult even in the best business environment. Unfortunately, today's is not the best business environment, so proving servicer value has now become crucial to not only servicer survival, but the survival of the market as a whole. Regulators can therefore do a great service to both the industry and borrowers in today's financial climate by insisting that servicers report adequate information to assess not only the success of major modification initiatives, but also performance overall. The increased investor dependence on third-party servicing that has accompanied securitization necessitates substantial improvements to investor reporting in order to support appropriate administration and, where helpful, modification of consumer loans in both the private and public interest. Without information, even the most highly subsidized modification policies are bound to fail.
SSRN Electronic Journal, 2009
SSRN Electronic Journal, 2011
American Economic Review, 2003
The consequences of bank distress for the economy during the Depression remain an area of unresol... more The consequences of bank distress for the economy during the Depression remain an area of unresolved controversy. Since John M. Keynes (1931) and Irving Fisher (1933), mac-* Calomiris: Graduate School of Business,
American Economic Review, 2003
We assemble bank-level and other data for Fed member banks to model determinants of bank failure.... more We assemble bank-level and other data for Fed member banks to model determinants of bank failure. Fundamentals explain bank failure risk well. The first two Friedman-Schwartz crises are not associated with positive unexplained residual failure risk, or increased importance of bank illiquidity for forecasting failure. The third Friedman-Schwartz crisis is more ambiguous, but increased residual failure risk is small in the aggregate. The final crisis (early 1933) saw a large unexplained increase in bank failure risk. Local contagion and illiquidity may have played a role in pre-1933 bank failures, even though those effects were not large in their aggregate impact.
Pacific-Basin Finance Journal, 2008
This study examines herding behavior in dual-listed Chinese A-share and B-share stocks. We find e... more This study examines herding behavior in dual-listed Chinese A-share and B-share stocks. We find evidence of herding within both the Shanghai and Shenzhen A-share markets that are dominated by domestic individual investors, and also within both B-share markets, in which foreign ...
Journal of Financial Services Research, 2004
This paper explores the motivations and desirability of off-balance-sheet financing of credit car... more This paper explores the motivations and desirability of off-balance-sheet financing of credit card receivables by banks. We explore three related issues: the degree to which securitizations result in the transfer of risk out of the originating bank, the extent to which securitization permits banks to economize on capital by avoiding regulatory minimum capital requirements, and whether banks' avoidance of minimum capital regulation through securitization with implicit recourse has been undesirable from a regulatory standpoint. We show that this intermediation structure could be motivated either by desirable efficient contracting in the presence of asymmetric information or by undesirable safety net abuse. We find that securitization results in some transfer of risk out of the originating bank but that risk remains in the securitizing bank as a result of implicit recourse. Clearly, then, securitization with implicit recourse provides an important means of avoiding minimum capital requirements. We also find, however, that securitizing banks set their capital relative to managed assets according to market perceptions of their risk and seem not to be motivated by maximizing implicit subsidies relating to the government safety net when managing their risk. Thus, the evidence is more consistent with the efficient contracting view of securitization with implicit recourse than with the safety net abuse view. Concerns expressed by policymakers about this form of capital requirement avoidance appear to be overstated.
Journal of Banking & Finance, 2004
The present paper uses data from revolving credit card securitizations to show that, conditional ... more The present paper uses data from revolving credit card securitizations to show that, conditional on being in a position where implicit recourse has become necessary and actually providing that recourse, recourse to securitized debt may benefit short-and longterm stock returns, and long-term operating performance of sponsors. The paper suggests that this result may come about because those sponsors providing the recourse do not seem to be extreme default or insolvency risks. However, sponsors providing recourse do experience an abnormal delay in their normal issuance cycle around the event. Hence, it appears that the asset-backed securities market is like the commercial paper market, where a firm's ability to issue is directly correlated with credit quality. Therefore, although in violation of regulatory guidelines and FASB140, recourse may have beneficial effects for sponsors by revealing that the shocks that made recourse necessary are transitory. Commercial banks have a strong incentive to sell assets in order to increase liquidity, reduce interest rate risk, and avoid burdensome regulations. However, most bank assets are high asymmetric information financial instruments and, as a result, are fundamentally illiquid. Hence, commercial banks have become increasingly reliant upon securitization as a means of selling assets. Business strategies that revolve around securitization are accompanied by a host of incentive conflicts. At various times during the 1990s, securitization has been associated with financial difficulties arising from fictitious financial ratios (gain-on-sale provisions), understated leverage (Enron), and hidden risks (Enron, PNC, and other commercial banks). The present paper concerns itself with the last of these, that is, the propensity for securitizations to mask risks to the sponsor, 1 whether the sponsor is a bank originating loans or a nonbank firm posting other collateral for securitization (Calomiris and Mason 2003; Jones 2000). Risks often remain with the sponsor because securitization-and the removal of assets from the sponsor's balance sheet-relies on a "true sale" to a legally remote third party. If the assets are not truly sold or the sale is not to a legally defined third party, the assets must be reported on the sponsor's balance sheet. One important condition that determines whether a true sale has taken place is whether the sale agreement provides recourse, or performance guarantees, to the buyer. If recourse terms are present, the assets pose a contingent risk to the seller which, under FASB140, prohibits the removal of the assets from the seller's balance sheet. While few loan sales contracts contain explicit terms that provide recourse, many loan sales (particularly those involving revolving collateral like credit card loans) hinge upon an implicit understanding that recourse may be provided by the sponsor. Such understandings exist