Cryptic Currency

Kevin Lewis

November 21, 2022

Caught between Frontstage and Backstage: The Failure of the Federal Reserve to Halt Rule Evasion in the Financial Crisis of 1974
Pierre-Christian Fink
American Sociological Review, forthcoming 


Rule evasion by companies is a major driver of change in contemporary market societies. Recent research holds that periods of market instability offer opportunities to bring rule evasion under control because crises expose hidden market practices. Based on original archival evidence from the financial crisis of 1974, this article shows that rule evasion is disclosed not automatically, but strategically and selectively. To explain the ensuing dynamics, the article develops a Goffmanian framework in which regulators learn of a crisis of rule evasion backstage (in their interactions with companies) but use a conventional definition of the situation frontstage (in their presentations to the public). In an as yet unrecognized outcome, the regulators may find themselves caught between frontstage and backstage: their communications to the public limit their room for maneuver against the companies backstage, forcing them to repurpose their extant crisis-management tools. Because regulators publicly pretend to stay within their mandate, this form of crisis response renders re-regulation of rule evasion less likely. The finding contributes a new explanation for a central puzzle in the burgeoning sociology of crises: why periods of instability so rarely lead to change.

Privatizing Financial Protection: Regulatory Feedback and the Politics of Financial Reform
Mallory Sorelle
American Political Science Review, forthcoming 


Consumer credit is a crucial source of financial support for most Americans — part of what scholars dub the “credit-welfare state.” Yet, borrowers have been reluctant to take political action to demand better consumer financial protection, even as subprime lending proliferates. This paper articulates a broad theory of regulatory feedback effects, proposing specific mechanisms through which regulatory policy making shapes consumers’ politics. Drawing on the case of consumer financial protection, I argue that consumer credit regulations produce feedback effects that diminish political engagement by encouraging borrowers to blame and subsequently target market actors — including financial institutions and consumers themselves — for both systemic and individual problems with predatory lending. I analyze an original policy dataset, original survey of 1,500 borrowers, and two survey experiments to test this hypothesis. I find that borrowers’ experiences with credit regulation diminish their political engagement, even for reforms they support, limiting the prospects for safeguarding Americans’ financial security.

Regulation, Taxation, and Economic Development
John McDermott & Luis Felipe Saenz
University of South Carolina Working Paper, July 2022 


In this paper we construct a model with increasing returns stemming from product variety to explore the different effects of regulations and taxes on economic development, real activity, and growth. Regulations raise fixed and variable costs, while taxes primarily increase variable costs. This is important because fixed costs determine the extent of specialization, which in our model plays an important role in human capital accumulation and development. Given the choice, taxation is preferred to regulation, because of regulation’s negative effects on the growth of human capital. Empirical tests using panel data across countries provides support for the theory.

Bowling alone, buying alone: The decline of co-borrowers in the US mortgage market
Eglė Jakučionytė & Swapnil Singh
Journal of Housing Economics, forthcoming 


This paper documents stylized and empirical facts associated with co-borrowers in the US mortgage market since the early 1990s. The share of mortgages with a co-borrower has declined dramatically across different income and demographic groups. We show that this decline, despite being a universal phenomenon across the US, evinces significant regional heterogeneity which contributes to the divergence in local mortgage markets outcomes. Regions with a lower co-borrower share have higher mortgage default rates. Further, in an event of an adverse shock, regions with a low share of mortgages with a co-borrower experience persistently lower house price growth, and lower purchase and refinance mortgage growth.

Rating Agency Fees: Pay to Play in Public Finance?
Jess Cornaggia, Kimberly Cornaggia & Ryan Israelsen
Review of Financial Studies, forthcoming


We examine the relationship between credit rating levels and rating agency fees in a public finance market in which rating agencies earn lower fees and face higher disclosure requirements relative to corporate bond and structured finance markets. Controlling for variation in the complexity of credit analysis at the issue level, we find evidence that rating agency conflicts of interest distort credit ratings in the municipal bond market. Unexpectedly expensive ratings are more likely downgraded, and inexpensive ratings are more likely upgraded. The relationship between credit ratings and rating agency fees is driven by issuers who lose access to AAA insurance.

The U.S. Postal Savings System and the Collapse of B&Ls During the Great Depression
Sebastián Fleitas, Matthew Jaremski & Steven Sprick Schuster
NBER Working Paper, October 2022


Building and Loan Associations (B&Ls) financed over half of new houses constructed in the U.S. during the 1920s but they lost their predominance within the following decades as they were pushed to convert into Savings and Loans (S&Ls). This study examines whether the U.S. government-insured Postal Savings System attracted funds away from B&Ls precisely when they needed them the most in the Great Depression. Annual town- and county-level data from 1920 through 1935 for 3 states show that the sudden rise in local postal savings was associated with local downturns in B&Ls. Using a panel vector autoregression, we find that postal savings significantly reduced the amount of money in B&Ls, yet B&Ls had no significant effect on postal savings banks. Alternatively, postal savings had no significant effect on commercial banks. The results suggest that this competitive dynamic prevented B&Ls from rebounding in the mid-1930s and helped contribute to Great Depression’s local real estate lending decline.

Merger Deregulation, Wages, and Inequality: Evidence from the U.S. Banking Industry
Abhay Aneja & Prasad Krishnamurthy
University of California Working Paper, July 2022 


We study the effect of bank merger deregulation on market structure and wages in the banking industry. We show that state deregulation of bank mergers and acquisitions increased the market share of large, multi-state banks and lowered wages for bank workers by up to 8 percentage points, with wage reductions occurring uniformly across the wage distribution. Deregulation had no measurable effect on employment within the banking industry, and no direct effect on banking-market concentration, though its effect on wages was larger in states with lower initial levels of concentration. These findings suggest that enhanced product-market competition between banks eroded worker rents. In contrast to theories predicting that increased competition will lower the racial wage gap, we find that deregulation increased the wage gap between black and white bank workers -- especially for higher-wage workers and managers. This increase in the racial wage gap cannot be fully explained by increased product market competition, changes in technology, or enhanced market power.

Workforce Policies and Operational Risk: Evidence from U.S. Bank Holding Companies
Filippo Curti, Larry Fauver & Atanas Mihov
Journal of Financial and Quantitative Analysis, forthcoming


Using supervisory data on operational losses from large U.S. bank holding companies (BHCs), we show that BHCs with socially responsible workforce policies suffer lower operational losses per dollar of total assets. The association significantly varies by the type of workforce policies and the type of operational losses. It is driven not only by small frequent losses, but also by severe tail operational risk events. Further, the risk-reducing effects of the socially responsible workforce policies are stronger for larger BHCs with more employees. Our findings have important implications for banking organization performance, risk, and supervision.

Paying for Performance in Public Pension Plans
Yan Lu, Kevin Mullally & Sugata Ray
Management Science, forthcoming 


We examine the relation between public pension plan chief investment officer (CIO) compensation and plans’ investment performance. Higher paid CIOs outperform their counterparts by 47–60 basis points per year, largely through increased and superior investment in private equity and real estate. This outperformance generates an additional $74.91–$95.63 million in economic value. Plans offering higher compensation hire better educated CIOs and are more likely to retain their CIOs. Higher CIO compensation is positively correlated with the use of incentive compensation, but incentive compensation does not directly affect performance. Demand- and supply-side frictions help explain the variation in CIO pay and the persistent low compensation paid by some plans despite the positive relation between compensation and performance.

All Clear for Takeoff: Evidence from Airports on the Effects of Infrastructure Privatization
Sabrina Howell et al.
NBER Working Paper, October 2022 


Infrastructure assets have undergone substantial privatization in recent decades. How do different types of owners target and manage these assets? And does the contract form — control rights (concession) vs. outright ownership (sale) — matter? We explore these questions in the context of global airports, which like other infrastructure assets have been privatized by private firms and private equity (PE) funds. Our central finding is that PE acquisitions bring marked improvements in airport performance along a rich array of dimensions such as passengers per flight, total passengers, number of routes, number of airlines, cancellations, and awards. Net income increases after PE acquisitions, which does not reflect lower costs or layoffs. In contrast, in the few cases where non-PE acquisitions bring some improvement, it appears to reflect targeting rather than operational changes. Overall, we find little evidence that privatization alone increases airport performance; instead, infrastructure funds improve performance both in privatization and subsequent acquisitions from non-PE private firms. These effects are largest when there is a competing airport nearby. Finally, we show that outright ownership rather than control rights alone is associated with the most improvement after privatization.


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