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Reputation and Sudden Collapse in Secondary Markets

Reputation and Sudden Collapse in Secondary Markets . Discussion by Andy Neumeyer Universidad Torcuato Di Tella. SEC probes second Goldman security. From the Financial Times. June 9 2010 23:42

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Reputation and Sudden Collapse in Secondary Markets

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  1. Reputation and Sudden Collapse in Secondary Markets

    Discussionby Andy Neumeyer Universidad Torcuato Di Tella
  2. SEC probes second Goldman security From the Financial Times. June 9 2010 23:42 “The US Securities and Exchange Commission has stepped up its inquiries into a complex mortgage-backed deal by Goldman Sachs that was not part of the civil fraud charges filed against the bank in April, according to people close to the matter. SEC interest in Hudson Mezzanine Funding, a $2bn collaterised debt obligation, comes amid settlement talks with Goldman over accusations that the bank defrauded investors in Abacus, a similar CDO.”
  3. MainConclusions of thepaper Adverse selection => multipleequilibria in secondarymarketsforloans Equilibriumrefinementselectsamongtheseequilibriawithsignalson colateral values Policiesimplemented in 2008 are eitherbadorirrelevant Assetpurchases Lowinterestrates
  4. Mainpoints of discussion Interpretation of secondarymarket Highlightsomemodellingchoices: assumethat new issues of ABS havethesamedistributions of returnsover time. Show some data Collateralvalues Interestrates
  5. Interpretation of SecondaryMarket Mortgages Car Loans StudentLoans CreditCards Sells ABS (withpossiblycomplexpayoff) Buysassetswitha cost q ABS Originator Buyer
  6. Interpretation of SecondaryMarket Mortgages Car Loans StudentLoans CreditCards Sells ABS (withpossiblycomplexpayoff) Buysassetswith at cost q ABS Originator Buyer imperfectinformation perfectinformation
  7. Interpretation of SecondaryMarket Mortgages Car Loans StudentLoans CreditCards Sells ABS (withpossiblycomplexpayoff) Buysassetswith at cost q ABS Originator Buyer imperfectinformation perfectinformation FRAGILE MARKET
  8. Interpretation of SecondaryMarket Mortgages Car Loans StudentLoans CreditCards Sells ABS (withpossiblycomplexpayoff) Buysassetswith at cost q Buyer imperfectinformation perfectinformation Goldman Chari FRAGILE MARKET
  9. Setup of theModel ABS Originator SellsABS Buyer
  10. StaticModel Secondary market exists iff ABS originator sells (is active) Perfect information: only costs matter Assumption on returns
  11. StaticModel Imperfect information (lemmons): there is trade iff
  12. DynamicModel In t = 2 New buyer observes payoff of ABS in t = 1 ABS originator issues ABS with same (π, c) of t = 1 Beliefs μ2 depend on actions and v realizations in t =1
  13. DynamicModel
  14. Dynamic Model: crucial assumptions ABS assembled by originator has always the same (π, c) Otherwise no Bayesian learning → all results collapse Other interpretation: update about whether the ABS originator truthfully disclosed the distribution What if the incentives to lie change over time ?
  15. If I taketheModelSeriously . . .
  16. Illustration of abruptcollapses All ABS collapse in 2007 Auto ABS, creditcards and studentloans revive in firsthalf of 2008 Collapse in september 2008
  17. Whydid auto ABS marketcollapse in 2007?
  18. InterestRates ABS Originator SellsABS Buyer
  19. InterestRates (staticmodel) Payoff sell hold r* InterestRate Marketcollapse
  20. InterestRates (DynamicModel) μ MultipleEquilibrium μ0 μ* μ r* InterestRate
  21. InterestRates in thePaper Whycollapse in 2007 and not in 2001? More discipline onμ?
  22. Conclusions Do wethinkthatdistributions of returnson ABS are constantover time across new issuances? Do more work in terms of matchingmodel and data
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