Amir Kermani

The Value of Connections in Turbulent Times: Evidence from the United States

The announcement of Timothy Geithner as nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for financial firms with which he had a connection. This return was about 6% after the first full day of trading and about 12% after ten trading days. There were subsequently abnormal negative returns for connected firms when news broke that Geithners confirmation might be derailed by tax issues. Excess returns for connected firms may reflect the perceived impact of relying on the advice of a small network of financial sector executives during a time of acute crisis and heightened policy discretion.

The value of connections in turbulent times: Evidence from the United States

The announcement of Timothy Geithner as nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for financial firms with which he had a prior connection. This return was about 6% after the first full day of trading and about 12% after ten trading days. There were subsequently abnormal negative returns for connected firms when news broke that Geithner’s confirmation might be derailed by tax issues. Personal connections to top executive branch officials can matter greatly even in a country with strong overall institutions, at least during a time of acute financial crisis and heightened policy discretion.

Credit-Induced Boom and Bust

Can a credit expansion induce a boom and bust in house prices and real economic activity? This paper exploits the federal preemption of national banks in 2004 from local laws against predatory lending to gauge the effect of the supply of credit on the real economy. Specifically, we exploit the heterogeneity in the market share of national banks across counties and in state anti-predatory laws to instrument for an outward shift in the supply of credit. First, a comparison between counties in the top and bottom deciles of presence of national banks in states with anti-predatory laws suggests that the preemption regulation resulted in a 11% increase in annual lending in the 2004-2006 period. Our estimates show that this lending increase is associated with a 3.3% rise in annual house price growth rate and a 2.2% expansion of employment in the non-tradable sectors. These effects are followed by a decline in loan origination, house prices and employment of similar magnitude in subsequent years. Furthermore, we show that the increase in the supply of credit reduced mortgage delinquency rates during the boom years but increased them in bust years. Finally, these effects are stronger for subprime and inelastic regions.

How Quantitative Easing Works: Evidence on the Refinancing Channel

Despite massive large-scale asset purchases (LSAPs) by central banks around the world since the global financial crisis, there is a lack of empirical evidence on whether and how the composition of purchased assets matters for the real effects of unconventional monetary policy. Using uniquely rich mortgage-market data, we document that there is a “flypaper effect” of LSAPs, where the transmission of unconventional monetary policy to interest rates and (more importantly) origination volumes depends crucially on the assets purchased and degree of segmentation in the market. For example, QE1, which involved significant purchases of GSE-guaranteed mortgages, increased GSE-guaranteed mortgage originations significantly more than the origination of non-GSE mortgages. In contrast, QE2’s focus on purchasing Treasuries did not have such differential effects. This de facto allocation of credit across mortgage market segments, combined with sharp bunching around GSE eligibility cutoffs, establishes an important complementarity between mortgage-market policy and the effectiveness of Fed MBS purchases. In particular, more relaxed GSE eligibility requirements would have resulted in more refinancing from economically distressed regions and fewer households deleveraging overall. Overall, our results imply that central banks could most effectively provide unconventional monetary stimulus by supporting the origination of debt that would not be originated otherwise. ∗We thank our discussants, Florian Heider, Anil Kashyap, and Philipp Schnabl; Adam Ashcraft, Geert Bekaert, Charles Calomiris, Gabriel Chodorow-Reich, Andreas Fuster, Sam Hanson, Arvind Krishnamurthy, Michael Johannes, David Romer, David Scharfstein, Jeremy Stein, Johannes Stroebel, Stijn Van Nieuwerburgh, Annette VissingJørgensen, and Paul Willen; workshop participants at Berkeley and Columbia; and seminar participants at the Catholic University of Milan, the Econometric Society 2016 Meetings, Federal Reserve Board, HEC Paris, NBER Monetary Economics, Northwestern-Kellogg, NYU-Stern, NY Fed/NYU Stern Conference on Financial Intermediation, Penn State, San Francisco Federal Reserve, Stanford, St. Louis Fed Monetary Policy and the Distribution of Income and Wealth Conference, University of Minnesota-Carlson, University of Illinois at Urbana-Champaign, and USC-Price for helpful comments and discussions. We also thank Sam Hughes, Sanket Korgaonkar, Christopher Lako, and Jason Lee for excellent research assistance. †Columbia Business School and NBER (mdimaggio@columbia.edu) ‡University of California, Berkeley and NBER (kermani@berkeley.edu) §University of California, Berkeley (cjpalmer@berkeley.edu)Despite massive large-scale asset purchases (LSAPs) by central banks around the world since the global financial crisis, there is a lack of empirical evidence on whether and how these programs affect the real economy. Using rich borrower-linked mortgage-market data, we document that there is a “flypaper effect” of LSAPs, where the transmission of unconventional monetary policy to interest rates and (more importantly) origination volumes depends crucially on the assets purchased and degree of segmentation in the market. For example, QE1, which involved significant purchases of GSE-guaranteed mortgages, increased GSE-eligible mortgage originations significantly more than the origination of GSE-ineligible mortgages. In contrast, QE2’s focus on purchasing Treasuries did not have such differential effects. We find that the Fed’s purchase of MBS (rather than exclusively Treasuries) during QE1 resulted in an additional

The Relevance of Broker Networks for Information Diffusion in the Stock Market

600 billion of refinancing, substantially reducing interest payments for refinancing households, leading to a boom in equity extraction, and increasing consumption by an additional

Does Skin‐in‐the‐Game Affect Security Performance?

76 billion. This de facto allocation of credit across mortgage market segments, combined with sharp bunching around GSE eligibility cutoffs, establishes an important complementarity between monetary policy and macroprudential housing policy. Our counterfactual simulations estimate that relaxing GSE eligibility requirements would have significantly increased refinancing activity in response to QE1, including a 20% increase in equity extraction by households. Overall, our results imply that central banks could most effectively provide unconventional monetary stimulus by supporting the origination of debt that would not be originated otherwise.

Household Credit and Local Economic Uncertainty

This paper shows that the network of relationships between brokers and institutional investors shapes the information diffusion in the stock market. We exploit trade-level data to show that central brokers gather information by executing informed trades, which is then leaked to their best clients. We show that after large informed trades, a significantly higher volume of other institutional investors execute similar trades through the same broker, allowing them to capture higher returns in the first few days after the initial trade. In contrast, we find that when the informed asset manager is affiliated with the broker, such imitation does not occur. Similarly, we show that the clients of the broker employed by activist investors to execute their trades tend to buy the same stocks just before the filing of the 13D. This evidence also suggests that an important source of alpha for fund managers is the access to better connections rather than superior skill.

The value of trading relations in turbulent times

We document that the amount of first-loss security retention in the conduit CMBS market has a significant impact on the probability that more senior tranches ultimately default. In particular, we demonstrate that an increase in the amount of first loss security retention is correlated with better security performance, after controlling for information available at issue. We then identify plausibly exogenous variation in the amount of first-loss security retention, relying on the greater ability of larger first loss investors to sell these positions into CRE CDOs given the need for large pools of collateral. Using this variation as an instrument, we measure a causal link between retention and performance. Further, we demonstrate that the risk associated with this agency problem was not priced at origination, as the interest rate on senior securities is not correlated with the amount of retention. Together, the evidence is consistent with the hypothesis that first-loss security retention is not supported by competitive market equilibrium and suggests that regulation of retention could improve outcomes.

Cheap Credit, Collateral and the Boom-Bust Cycle

This paper investigates the impact of uncertainty on consumer credit outcomes. We develop a local measure of economic uncertainty capturing county-level labor market shocks. We then exploit microeconomic data on mortgages and credit-card balances together with the crosssectional variation provided by our uncertainty measure to show strong borrower-specific heterogeneity in response to changes in uncertainty. Among high risk borrowers or areas with more high risk borrowers, increased uncertainty is associated with housing market illiquidity and a reduction in leverage. For low risk borrowers, these effects are absent and the cost of mortgage credit declines, suggesting that lenders reallocate credit towards safer borrowers when uncertainty spikes. A similar pattern is observed in the unsecured credit market. Taken together, local uncertainty might independently affect aggregate economic activity through consumer credit markets and could engender greater inequality in consumption and housing wealth accumulation across households.