Will a fragile banking system survive future runs? – Lawrence Schmidt

Lawrence Schmidt, Assistant Professor, Finance

From Barron’s. 

Events surrounding the failure of Lehman Brothers 10 years ago nearly brought down the world’s financial system. While much of the dust has settled, economists and policy makers still seek to better understand the forces that led a set of seemingly small losses on mortgage-backed securities tied to the U.S. housing market to trigger the worst global financial crisis since the Great Depression.

A strong candidate is the series of “runs”—large-scale, rapid withdrawals of short-term funding—that took place throughout 2007-08. The most dramatic run occurred on money market funds (MMFs) immediately following Lehman’s collapse. In a week, investors withdrew more than $300 billion from this market. This figure likely would have been larger had the Treasury not taken the unprecedented step of offering temporary guarantees to MMFs.

What causes runs? One economic theory posits that runs are the result of, and exacerbated by, investors’ self-fulfilling beliefs about other investors’ actions. The nature of banking is fragile. The bank keeps cash on hand to meet depositors’ daily needs, but it will lose money and may fail if it runs out of cash and is faced with the difficult task of selling its loans on short notice. Suppose, though, a depositor is worried a “run” might take place. If she believes that others are asking for their money back she is incentivized to do the same. First out wins; last out loses. If, however, others are not in a panic, that depositor will wait it out and the bank survives.

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Pinpointing which firms fudge earnings numbers and why – Delphine Samuels

MIT Sloan Assistant Professor, Accounting Delphine Samuels

From The Hill

It’s widely assumed that executives are less likely to inflate their earnings when they work at high profile companies that operate under a good deal of regulatory oversight.

Yet it’s also widely known that managers in high-profile companies face tremendous pressure from investors to meet or beat Wall Street estimates every quarter, which incentivizes them to overstate their company’s performance.

How should policymakers looking to curb accounting fraud reconcile these countervailing forces? My colleagues —Daniel J. Taylor and Robert E. Verrecchia, both at the University of Pennsylvania’s Wharton School — and I set out to answer that question. Read More »

Opinion: Why Wall Street’s discrimination against women has no future – Lotte Bailyn

MIT Sloan Professor Emerita Lotte Bailyn

MIT Sloan Professor Emerita Lotte Bailyn

From Market Watch

We are well-accustomed by now to the ways in which women are mistreated and discriminated against on Wall Street.

Over the past decade, nearly every major bank — from Goldman Sachs GS to Morgan Stanley MS, Citigroup C— has settled a sex discrimination suit. News reports have exposed in lurid detail just how badly women are underpaid; the degree to which they face hostility from their male peers; and how they are subjected to a demeaning environment and made to feel inferior.

The latest gender bias suit, filed by Megan Messina, a senior fixed-income banker, is against Bank of America. The suit accuses BofA of vastly underpaying her and other women. In addition, Messina said her boss made her feel unwelcome in his “’bro’s club’,” and subjected her to questions like, “Have your eyes always been that blue?” The suit also accuses the bank of misconduct, and describes alleged instances of front-running trades and withholding information from clients.

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How would democratic presidential hopefuls reform Wall Street? — Simon Johnson

MIT Sloan Prof. Simon Johnson

MIT Sloan Prof. Simon Johnson

From Moyers & Company

In recent years, parts of the financial sector have behaved badly — and holding the relevant executives accountable has not been a strong suit of the Obama administration. So financial reform is an important issue for the country, and whoever wins the Democratic Party presidential nomination will find that it resonates with many voters in the general election.

Former Secretary of State Hillary Clinton, Senator Bernie Sanders, and former Maryland Governor Martin O’Malley have each put forward detailed and specific plans, including more action by the Justice Department.

All of them also agree that the 2010 Dodd-Frank Act moved some issues in the right direction but there remains a substantial and important, unfinished agenda. The principal disagreement among the three camps comes down to this: what is the structural problem with our financial system, and how should we fix it?

Senator Sanders and Governor O’Malley correctly point out that in recent decades some banks became very large and the crisis did nothing to shrink their balance sheets. These banks are commonly and accurately regarded as “too big to fail,” meaning that they benefit from an implicit government guarantee. This is a dangerous and unfair subsidy.

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A professor finds gender bias on Wall Street — Lily Fang

MIT Sloan Visiting Associate Professor of Finance Lily Fang

MIT Sloan Visiting Associate Professor of Finance Lily Fang

From Wall Street Journal

Men and women have different experiences when it comes to Wall Street careers. And those differences fascinate Lily Fang.

Dr. Fang, an associate professor of finance on the Singapore campus of the business school Insead, has spent the past five years or so delving into how gender affects the career-development paths of stock-research analysts on Wall Street. What she and co-author Sterling Huang of Singapore Management University found was that the networking and personal connections that male analysts rely on so heavily to get ahead are much less useful for women in similar jobs.

Dr. Fang says the audience for this type of gender research has grown in recent years as it has become apparent that women—despite making great strides in many competitive industries—remain underrepresented in top echelons of the corporate world.

A native of Shanghai with a doctoral degree from the University of Pennsylvania’s Wharton School, Dr. Fang is spending a year as a visiting associate professor at MIT’s Sloan School of Management in Cambridge, Mass.

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