Uncle Sam needs fresh strategy to manage federal lending programs – Doug Criscitello

Doug Criscitello, Executive Director of MIT’s Center for Finance and Policy

MIT Sloan Executive Director of MIT’s Center for Finance and Policy, Doug Criscitello

From The Hill

The United States government today is one of the largest consumer lending institutions in the world. Its expansive loan portfolio has been growing for years with little attention given to designing a coordinated approach for administering its lending activities. With a credit portfolio now exceeding $4 trillion and comprising more than 100 loan programs dispersed across 20 or so federal agencies, the government must take a serious look at how it plans for and operates its many credit programs.

The United States spends about $3 billion a year managing its portfolio of loans. It is hard to imagine a more disparate jumble of agencies that now make loans to home buyers, college students, small business owners, and various other borrowers. The government and its citizens would benefit significantly from taking a more coordinated approach. The creation of a single credit entity that consolidates the credit actions performed by the various agencies doing the job today would result in significant savings relative to the current approach. It would also realize some significant efficiencies to improve outcomes for borrowers and the government.

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The unending pain of student debt: effect of risk preferences – Debarshi Nandy, Birzhan Batkeyev, Karthik Krishnan

Debarshi Nandy, Visiting Associate Professor, MIT Sloan School of Management

From The Finance Lab

The dangerous and sometimes disastrous consequences of student loan debt are well known. We know for a fact that students with high debt levels are less likely to be entrepreneurs, less likely to own a home when they are 45, and less likely to find an ideal job.  The value of a college education is therefore reduced dramatically for those who need to service the debt to pay for it.

However, until recently, few have studied the long-term effects of student debt on the net worth of families burdened by the loans.  With my colleagues, Birzhan Batkeyev and Karthik Krishnan, I recently set out to address this gap—showing once again that the very loans that are supposed to help students get a leg up on their financial future, hamper them in myriad ways instead.

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Why emerging-markets investors should cheer Moody’s support for South Africa – Robert Pozen and John Liackman

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From MarketWatch

Last fall, S&P cut the rating on South Africa’s sovereign debt from investment grade to junk status, and Moody’s began a formal review to consider a parallel downgrade. Late on Friday, March 23, however, Moody’s reaffirmed South Africa’s investment-grade status and changed its outlook to stable.

This has significant implications for emerging-markets investors. Moody’s decision constitutes a strong vote of confidence in the rapid-fire actions by the country’s new president, Cyril Ramaphosa. As Moody’s explained: “The confirmation of South Africa’s rating represents Moody’s view that the previous weakening of South African institutions will gradually reverse under a more transparent and predictable policy framework.”

We agree with Moody’s decision to support the governmental initiatives taken by Ramaphosa — an unique politician with historic trade union roots and extensive experience as a company executive. He is quickly building the foundation for a better investment environment in South Africa, although he imminently faces the extremely difficult challenge of land reform.

Here is a brief chronology: On December 17, 2017, Rampaphosa won a closely contested election to head the African National Congress (ANC), the dominant political party in South Africa. Then, on February 15, Rampaphosa was elected the president of South Africa, replacing Jacob Zuma. On March 16, national prosecutors filed a criminal suit again Zuma, including charges of corruption, money laundering and racketeering. Read More »

The Fix for Misleading ‘CEO Pay Ratios’ – Robert Pozen and Kashif Qadeer

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan MBA ’18, Kashif Qadeer

From The Wall Street Journal

In the coming weeks, many public companies in the U.S. will disclose for the first time their “pay ratios”—the CEO’s compensation divided by the median employee’s. The requirement to provide this ratio was included in the Dodd-Frank Act of 2010. But comparing the figures among different companies—and particularly different industries—will hardly be a straightforward task.

The consulting firm Equilar estimates that the pay ratio will be two or three times as high for retailers as for drug, financial or tech companies. But the reason isn’t soaring CEO pay in the retail industry. For one thing, midlevel retail workers simply make less, on average, than their peers in pharma, finance and tech, which skews the ratio.

Another issue is that 31% of retail employees work part-time, compared with 17% for the rest of American employees. When computing the CEO pay ratio, the Securities and Exchange Commission prohibits companies from adjusting part-time earnings to “annualize” them—to show what these employees would have earned if working full-time. The SEC also bars companies from counting several part-time employees as a single full-time equivalent. Because of this, having many employees who work only a few days each week drags down the median.

To understand how much this might overstate the pay ratio, we examined data for a midsize retail company that operates about 1,200 stores, primarily in the U.S. The company had more than 25,000 employees in 2017. Almost half worked less than 30 hours a week. The median pay of these part-timers (without annualizing) was less than $6,000 a year. By contrast, the median pay of full-time employees who worked for the whole year was approximately $30,000. Read More »

Closing the lending gap will help government and business thrive – Doug Criscitello

Doug Criscitello, Executive Director of MIT’s Center for Finance and Policy

Doug Criscitello, Executive Director of MIT’s Center for Finance and Policy

From The Hill

With taxpayers at risk for $20 trillion in loans and insured obligations, worth more than the five largest American bank companies combined, the United States government is essentially the largest financial institution in the world. Lending is a risky business as we learned during the last financial crisis. Government activities in this regard are no less dangerous, and perhaps more so, given public policy complexities that extend well beyond profit. Given a bleak fiscal outlook, policymakers may want to consider ways to reduce taxpayer exposure by fortifying financial institutions and financial technology companies with an enormous infusion of loan performance data that only it can provide.

Through a set of more than 100 programs largely initiated or expanded in response to the Great Depression, the Great Society programs of the 1960s, and the 2008 financial crisis, the government has provided over 100 million direct loans and guarantees for home ownership, higher education, business assistance, and a variety of other purposes. As the government has increasingly turned to credit programs to accomplish a diverse set of objectives, with its loan portfolio more than doubling since 2008, it is challenged to keep pace with an increasingly sophisticated financial marketplace, which could actually help reduce the federal lending role.

Government forays into this realm are typically driven by a desire to extend the lending frontier, thereby achieving societal gains, by either closing information gap about borrower creditworthiness or by providing an explicit subsidy to borrowers who likely would not be granted a loan even if a private lender had full information. The government can increase credit availability under either of those conditions because, unlike private lenders, it is able to offer loans without regard for profit. Read More »