Discussion by Andy Neumeyer Universidad Torcuato Di Tella SEC probes second Goldman security From the Financial Times June 9 2010 2342 The US Securities and Exchange Commission has stepped up its inquiries into a complex mortgagebacked deal by ID: 1032161
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1. Reputation and Sudden Collapse in Secondary Markets Discussion byAndy NeumeyerUniversidad Torcuato Di Tella
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3. SEC probes second Goldman securityFrom 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.”
4. Federal Reserve’s Assets
5. Interest Rates
6. Main Conclusions of the paperAdverse selection => multiple equilibria in secondary markets for loansEquilibrium refinement selects among these equilibria with signals on colateral valuesPolicies implemented in 2008 are either bad or irrelevantAsset purchasesLow interest rates
7. Main points of discussionInterpretation of secondary marketHighlight some modelling choices: assume that new issues of ABS have the same distributions of returns over time.Show some dataCollateral valuesInterest rates
8. Interpretation of Secondary MarketABS OriginatorMortgagesCar LoansStudent LoansCredit CardsBuys assets with a cost qSells ABS (with possibly complex payoff)Buyer
9. Interpretation of Secondary MarketBuys assets with at cost qSells ABS (with possibly complex payoff)Buyerperfect information imperfect information MortgagesCar LoansStudent LoansCredit CardsABS Originator
10. Interpretation of Secondary MarketBuys assets with at cost qSells ABS (with possibly complex payoff)Buyerperfect information imperfect information FRAGILE MARKETMortgagesCar LoansStudent LoansCredit CardsABS Originator
11. Interpretation of Secondary MarketBuys assets with at cost qSells ABS (with possibly complex payoff)Buyerperfect information imperfect information Goldman ChariFRAGILE MARKETMortgagesCar LoansStudent LoansCredit Cards
12. Setup of the ModelABS OriginatorSells ABSBuyer
13. Static ModelSecondary market exists iff ABS originator sells (is active)Perfect information: only costs matterAssumption on returns
14. Static ModelImperfect information (lemmons): there is trade iff
15. Dynamic ModelIn t = 2New buyer observes payoff of ABS in t = 1ABS originator issues ABS with same (π, c) of t = 1Beliefs μ2 depend on actions and v realizations in t =1
16. Dynamic Model
17. Dynamic Model: crucial assumptionsABS assembled by originator has always the same (π, c)Otherwise no Bayesian learning → all results collapseOther interpretation: update about whether the ABS originator truthfully disclosed the distributionWhat if the incentives to lie change over time ?
18. If I take the Model Seriously . . .
19. Illustration of abrupt collapsesAll ABS collapse in 2007Auto ABS, credit cards and student loans revive in first half of 2008Collapse in september 2008
20. Why did auto ABS market collapse in 2007?
21. ABS OriginatorSells ABSBuyerInterest Rates
22. Interest Rates (static model)sellholdInterest RatePayoffr*Market collapse
23. Interest Rates (Dynamic Model)Interest Rateμr*μ*μμ0Multiple Equilibrium
24. Interest Rates in the PaperWhy collapse in 2007 and not in 2001?More discipline on μ?
25. ConclusionsDo we think that distributions of returns on ABS are constant over time across new issuances?Do more work in terms of matching model and data