The Financial Crisis on Trial: What Went Wrong

Investment Banks ◽

Trial Court ◽

Investment Bankers ◽

The Great Recession ◽

Business Executives ◽

Financial Panic ◽

Criminal Intent ◽

Americans demanded retribution from the mortgage lenders whose subprime loans defaulted and from investment bankers whose mortgage-backed securities sharply declined in value in 2007, leading to financial panic and the Great Recession. From 2008 to 2019, the federal government extracted hundreds of billions in fines from dozens of corporations, but few individual business executives were held accountable, and no senior banker was convicted of a crime. I use the trial court record of five government enforcement cases against individuals to explain this apparently anomalous result. I conclude that, in addition to a lack of funding, the prosecution effort was hindered by the government’s erroneous selection of cases to pursue. Further, the diffused nature of decision making in the mortgage finance market made it difficult to prove that any one senior-level participant had the criminal intent necessary for a conviction or a Securities and Exchange Commission civil fine or injunction. The trial results also support the argument that the growth and consolidation of investment banks from 1990 to 2008 created incentives for misconduct within the firms.

Does Audit Committee Disclosure of Partner-Selection Involvement Signal Greater Audit Quality?

Accounting Horizons ◽

10.2308/horizons-2020-080 ◽

2021 ◽

Author(s):

Jimmy F. Downes ◽

Michelle A. Draeger ◽

Abbie E. Sadler

Keyword(s):

Audit Committee ◽

Audit Quality ◽

Selection Process ◽

Partner Selection ◽

Analyst Forecasts ◽

Audit Committees ◽

Voluntary Disclosures ◽

Level Of Involvement ◽

We investigate whether audit committees use voluntary disclosures to signal the committees’ higher level of involvement in the audit partner-selection process, which contributes to higher levels of audit quality. Audit committees more involved in the partner-selection process should ensure the selection of a more rigorous partner. We test this conjecture by first identifying partners new to audit engagements. We then compare audit quality for companies whose audit committees disclose involvement in the selection of the new partner to those without this disclosure. We find that this disclosure is positively associated with audit quality (measured using discretionary accruals, misstatements, and meeting consensus analyst forecasts by a very small margin). Our results are more salient for complex companies and those with powerful audit committees. These findings highlight that audit committees use their disclosures to signal involvement in the partner-selection process and are relevant to the Securities and Exchange Commission.

Financial Restatements and Shareholder Ratifications of the Auditor

Auditing A Journal of Practice & Theory ◽

10.2308/aud.2009.28.1.225 ◽

2009 ◽

Vol 28 (1) ◽

pp. 225-240 ◽

Cited By ~ 45

Author(s):

Li-Lin Liu ◽

K. Raghunandan ◽

Dasaratha Rama

Keyword(s):

Audit Quality ◽

Empirical Support ◽

Financial Statement ◽

Shareholder Voting ◽

Financial Restatements ◽

Preceding Period ◽

Significant Attention ◽

The U.S ◽

SUMMARY: Regulators and legislators have focused significant attention on financial statement restatements in recent years, and the U.S. Securities and Exchange Commission (SEC) and financial statement users view restatements as audit failures. The SEC (2000, 2003a) suggests that shareholder voting on auditor ratification will be impacted by perceptions of audit quality. In this paper we examine shareholder voting on auditor ratifications in 2005 or 2006 following restatement announcements by SEC registrants. We find that shareholders are more likely to vote against auditor ratification after a restatement when compared with votes at (1) firms without restatements or (2) restating firms in the preceding period. Overall, the results provide empirical support to the SEC's assertion that shareholder voting on auditor ratification will be related to perceptions of audit quality, and also support recent actions by shareholder activists to require all firms to submit the selection of the auditor for a ratification vote by shareholders.

Settlement payouts will promote US whistle-blowing

Emerald Expert Briefings ◽

10.1108/oxan-db207963 ◽

2016 ◽

Keyword(s):

Class Action ◽

Department Of Justice ◽

Content Type ◽

Whistle Blowing ◽

Enforcement Action ◽

Residential Mortgage ◽

Limited Class ◽

A Company

Significance The marked increase in 2015 expenses stems in part from Goldman's 5.1-billion-dollar settlement with the Department of Justice (DoJ) and various federal and state regulators announced on January 14 relating to the firm's securitisation, underwriting and sale of residential mortgage-backed securities from 2005 to 2007. On January 15, the Securities and Exchange Commission (SEC) announced a 700,000-dollar award to a whistle-blower, the first-ever such award to a company outsider for analysis that led to a successful enforcement action. Impacts The SEC's whistle-blower payout to an outsider may incentivise further 'bounty-hunting' against corporations by external experts. Business-friendly judicial decisions that have limited class action recoveries will not necessarily restrict whistle-blower claims. The salience of the Sanders campaign among primary voters skews post-election political headwinds against deregulation-friendly Democrats.

Restrictions on Allocation Discretion: Evidence from Clawbacks in Hong Kong IPOs

Quarterly Journal of Finance ◽

10.1142/s2010139213500183 ◽

2013 ◽

Vol 03 (03n04) ◽

pp. 1350018 ◽

Cited By ~ 1

Author(s):

Emmanuel Morales-Camargo

Keyword(s):

Hong Kong ◽

Institutional Investors ◽

Price Discovery ◽

Distribution Functions ◽

Investment Banks ◽

Individual Investors ◽

Investment Bankers ◽

Retail Investors ◽

Just Price ◽

Public Offer

The presence of both restricted and unrestricted, US-style, bookbuilt initial public offer (IPOs) in Hong Kong provides an ideal environment to test numerous underpricing models by simultaneously measuring the effects of allocation restrictions on the investment bankers' price discovery, underwriting, and distribution functions. While clawbacks, a set of allocation restrictions favoring retail investors not participating in the roadshow result in diminished and more expensive price discovery, they also reduce the investment bankers' dependence on institutional investors to dispose off IPO shares, resulting in lower underpricing. This favors models that highlight the importance of the underwriting function on underpricing, and shows that allocation restrictions can impact more than just price discovery. In addition, this study shows that individual investors can partially offset the loss of roadshow information caused by clawbacks, countering the idea that investment banks are unable to extract any pricing information from investors outside their list of roadshow regulars.

The Changing Nature of Gender Selection into Employment over the Great Recession

Economic Policy ◽

10.1093/epolic/eiaa025 ◽

2020 ◽

Author(s):

Juan J Dolado ◽

Cecilia Garcίa-Peñalosa ◽

Linas Tarasonis

Keyword(s):

Great Recession ◽

Recovery Phase ◽

Female Employment ◽

Large Female ◽

The Great Recession ◽

Added Worker Effect ◽

And Gender ◽

Gender Groups ◽

Workforce Composition ◽

Abstract The Great Recession has strongly influenced employment patterns across skill and gender groups in EU countries. We analyze how these changes in workforce composition might distort comparisons of conventional measures of gender wage gaps via non-random selection of workers into EU labour markets. We document that male selection (traditionally disregarded) has become positive during the recession, particularly in Southern Europe. As for female selection (traditionally positive), our findings are twofold. Following an increase in the LFP of less-skilled women, due to an added-worker effect, these biases declined in some countries where new female entrants were able to find jobs, whereas they went up in other countries which suffered large female employment losses. Finally, we document that most of these changes in selection patterns were reversed during the subsequent recovery phase, confirming their cyclical nature.

Do Underwriters Create Value In The Determination Of The IPO Final Offering Price?

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v25i6.990 ◽

2011 ◽

Vol 25 (6) ◽

Cited By ~ 1

Author(s):

Barry Thornton ◽

Michael Adams ◽

George Hall

Keyword(s):

Price Change ◽

Empirical Support ◽

Ipo Underpricing ◽

Investment Bankers ◽

Final Offer ◽

Price Range ◽

First Time ◽

Offering Price ◽

Initial Price

A company sets a price range in their “red herring” prospectus filed with the Securities and Exchange Commission when they issue shares for the first time.  The firm’s investment bankers then test the market to determine if the shares can be sold.  The final offer price will be above, within or below the initial price range in the “red herring.”  This paper studies the first day price change and relates it to the final offering price being set below, within or above the initial price range.  Based on six years (2002-2007) of market data, covering both bull and bear markets, it appears that investors might be able to realize higher percentage gains on the first day by investing in those stocks that are priced above the range indicated in the “red herring.” Furthermore, the exchange on which the IPOs are traded also plays a significant role in the first day price change. We find empirical support for the partial price adjustment hypothesis of IPO underpricing and this finding is robust with respect to market regiments.

7. The global financial crisis and the Eurozone sovereign debt crisis

Banking: A Very Short Introduction ◽

10.1093/actrade/9780199688920.003.0007 ◽

2016 ◽

pp. 101-118

Author(s):

John Goddard ◽

John O. S. Wilson

Keyword(s):

Financial Crisis ◽

Sovereign Debt ◽

Global Financial Crisis ◽

Debt Crisis ◽

Investment Banks ◽

Sovereign Debt Crisis ◽

The Us ◽

European Banks ◽

The Global Financial Crisis

‘The global financial crisis and the Eurozone sovereign debt crisis’ describes the chain of events in the US financial crisis that then triggered the Eurozone banking collapse. It outlines the problems in US mortgage-backed securities, the collapse of three of the ‘big five’ investment banks (Bear Stearns, Lehman Brothers, and Merrill Lynch), and the actions of the US Federal Reserve and the Treasury. Several major European banks also foundered at the height of the financial crisis as a consequence of the US crisis and, by the end of 2014, five Eurozone member countries—Ireland, Greece, Spain, Portugal, and Cyprus—had received bailout loans from the EU and International Monetary Fund, conditional on the implementation of tough austerity measures.

Retail Apocalypse? Maybe blame accounting. Investigating inventory valuation as a determinant of retail firm failure

American Journal of Business ◽

10.1108/ajb-07-2019-0050 ◽

2020 ◽

Vol 35 (2) ◽

pp. 83-101

Author(s):

Gregory G. Kaufinger ◽

Chris Neuenschwander

Keyword(s):

Capital Investment ◽

Binary Logistic Regression ◽

Retail Sector ◽

Publicly Traded ◽

Binary Logistic Regression Model ◽

Content Type ◽

The Great Recession ◽

Valuation Method ◽

Practical Implications ◽

PurposeThe purpose of the study is to evaluate whether the selection of accounting method used to value inventory increases or decreases the probability of a retail firm's ability to remain in existence.Design/methodology/approachThis study employs a binary logistic regression model to predict group membership and the probability of failure. The study utilizes an unbalanced sample of US publicly traded failed and functioning retail firms over a ten-year period.FindingsThe results clearly support the conclusion that there is a difference in the probability of retail firm failure with respect to the accounting method used to value inventory. Merchants using a cost-based valuation method were 2.3 times more likely to fail than firms using a price-based method. The results also affirm existing bankruptcy literature by finding that profitability, liquidity, leverage, capital investment and cash flow are factors in retail failures.Practical implicationsThe results suggest that traditional merchants cannot simply blame e-commerce or shifts in demographics for the retail Apocalypse; good management and proper valuation of stock still matter.Originality/valueThis study is the first to look at firm failure in the retail sector after the great recession of 2008, in an era known as the “retail Apocalypse.” In addition, this study differs from other firm failure literature by incorporating cost- and price-based inventory valuation methods as a variable in firm failure.

Highway 79 Revisited: “Mega” Trends in the Sun Corridor

A Great Aridness ◽

10.1093/oso/9780199778928.003.0012 ◽

2011 ◽

Author(s):

William deBuys

Keyword(s):

Investment Banks ◽

Peak Oil ◽

Credit System ◽

Subprime Mortgage ◽

Personal Lives ◽

The Great Recession ◽

Long Run ◽

Home Building ◽

Ghost Towns ◽

New Generation

Whether you are breaking prairie sod in the nineteenth century or raising a family and scrambling to make ends meet in the twenty-first, it is hard to get worked up over abstract possibilities. There is too much that needs doing, right here, right now. Even knowing the odds, people still live in earthquake zones, hurricane alleys, and the unprotected floodplains of mighty rivers. The warm embrace of a thirsty aridland city is not so different. Generally speaking, it is hard for any of us to get seriously concerned about what might happen until it does happen. That’s why the politics of climate change are so difficult. The measurements and observations that convince scientists about the warming of Earth are invisible to the rest of us. We fail to sense them at the scale of our personal lives. And believing in the verdicts of computer models about what might happen twenty or forty years in the future, well, that is tantamount to a leap of faith, and most people don’t ordinarily jump that far. Believing in the growth of cities can be difficult, too. Beginning in 2007, the domino of subprime mortgage defaults knocked over the domino of overleveraged investment banks, which toppled a wobbly world credit system, which upended industries around the globe and ushered in the Great Recession. 1 The home-building industries of growth-crazy cities like Las Vegas and Phoenix collapsed virtually overnight. Suburbs from Florida to California became ghost towns where wind-driven litter piled up in doorways and weeds grew higher than the sills of boarded-up windows. Some analysts predicted the emergence of a new generation of suburban slums and the death of gas-guzzling, car-dependent, long-commute suburban lifestyles. 2 Indeed, in the long run, considering the implications of peak oil and peak water and the likelihood of more severe climate reckonings than we’ve yet seen, such a demise seems likely—though maybe not quite yet.

Outside the Box: Unconventional Monetary Policy in the Great Recession and Beyond

The Journal of Economic Perspectives ◽

10.1257/jep.32.4.121 ◽

2018 ◽

Vol 32 (4) ◽

pp. 121-146 ◽

Cited By ~ 28

Author(s):

Kenneth N. Kuttner

Keyword(s):

Interest Rate ◽

Federal Reserve ◽

Balance Sheet ◽

Federal Funds ◽

Federal Funds Rate ◽

Monetary Policies ◽

The Great Recession ◽

Policy Statements ◽

Government Sponsored Enterprises

In November 2008, the Federal Reserve faced a deteriorating economy and a financial crisis. The federal funds rate had already been reduced to virtually zero. Thus, the Federal Reserve turned to unconventional monetary policies. Through “quantitative easing,” the Fed announced plans to buy mortgage-backed securities and debt issued by government-sponsored enterprises. Subsequent purchases would eventually lead to a five-fold expansion in the Fed’s balance sheet, from $900 billion to $4.5 trillion, and leave the Fed holding over 20 percent of all mortgage-backed securities and marketable Treasury debt. In addition, Fed policy statements in December 2008 began to include explicit references to the likely path of the federal funds interest rate, a policy that came to be known as “forward guidance.” The Fed ceased its direct asset purchases in late 2014. Starting in October 2017, it has allowed the balance sheet to shrink gradually as existing assets mature. From December 2015 through June 2018, the Fed has raised the federal funds interest rate seven times. Thus, the time is ripe to step back and ask whether the Fed’s unconventional policies had the intended expansionary effects—and by extension, whether the Fed should use them in the future.