Nicole BoysonNortheastern University

Jean HelwegeUniversity of South Carolina

Jan JindraMenlo College

Empirically, a bad financial system is correlated with worse recessions ◦ Bordo and Haubrich (2009), Berger and Bouwman (2010),

Bernanke and Gertler (1989) and Bernanke and Lown (1991)

Ivashina and Scharfstein (2010) argue that lending fell sharply in the past recession because the banks were funding constrained ◦ Suggests recession was much worse due to unusually low

lending and frozen debt markets

A potential explanation for the link between recessions and financial crises involves funding shortfalls at financial institutions

Recent theories focus on liquidity shocks as a source of financial crises that create problems for lending and thus the real economy.◦ Allen and Carletti (2006), Adrian and Shin (2008, 2009),

Brunnermeier and Pedersen (2009), Diamond and Rajan (2009), Froot (2009), Geanakoplos (2010), Gromb and Vayanos (2002),Krishnamurthy (2009), Korinek (2009)

Crisis starts when financial firms experience a liquidity shock, and is amplified via asset sales.◦ Liquidity shock affects banks◦ Lost funding is dealt with by selling off assets◦ Asset sales cause price to drop◦ Losses from fire sales reduce capital◦ Lower capital drives feedback loop (asset price spiral)◦ Illiquidity may lead to bank insolvency◦ Capital shortage leads to pullback in lending that hurts

nonfinancial firms and exacerbates recession

Plenty of empirical studies show support for idea that liquidity shocks lead to asset spirals in financial crises:◦ Adrian and Shin (2009) show that I-bank growth is related to

leverage; Adrian and Brunnermeier (2009) provide evidence on feedbacks and correlations among large financial firms

◦ Gorton and Metrick (2009) and Brunnermeier (2009) point to problems in the repo market, suggesting the banks that relied on short term capital markets funding were hurt most when liquidity shocks hit

◦ Hedge fund studies show that funding liquidity and market liquidity appear to be related. He, Khang and Krishnamurthy (2010), Ben-David, Franzoni, and

Moussawi (2010), Billio, Getmansky, and Pellizon (2009), Sadka (2010), and Aragon and Strahan (2009)

Why would banks put themselves in such a precarious situation? ◦ Beltratti and Stulz (2009) show that commercial banks that

got into the most trouble in the last crisis were those most focused on maximizing shareholder value

◦ Is exposure to liquidity shocks an undesirable side effect of optimal bank strategy?

Previous research suggests there are alternative ways to deal with liquidity shocks besides fire sales◦ Greater use of deposits (Gatev, Schuermann and Strahan

(2009)◦ Equity issuance (Berger, DeYoung, Flannery, Lee, and Oztekin

(2008) and Cornett and Tehranian (1994))◦ “Cherrypick” assets (Beatty, Chamberlain and Magliolo

(1995))◦ Discount window (Furfine (2001))

Previous literature also provides some evidence that liquidity shocks do not amplify price spirals:◦ Kashyap and Stein (2000): Lending at largest banks doesn’t fall when

money is tight, due to better access to capital markets.◦ Gatev and Strahan (2006): Deposit flows increase in troubled times,

acting as a hedge when demand for bank credit rises. ◦ He, Khang and Krishnamurthy (2010): Commercial banks were rare

among financial firms in their purchases of MBS in the last crisis. ◦ Demsetz (1993, 2000): Loan sales go down in bad times.◦ Cao, Chen, Liang and Lo (2009): Hedge funds seem to be able to time

market liquidity◦ Anand, Irvine, Puckett and Venkataraman (2010): institutions sell off

liquid assets in a crisis◦ Ambrose, Cai, Helwege (2009): Prices don’t fall just because an asset

is sold

What is the role of liquidity shocks for financial institutions during financial crises?

Theory suggests that the more heavily a firm relies on funding from the capital markets, the more likely it will need to sell assets into a falling market.◦ Hedge funds should be more affected than investment banks (IB)

and commercial banks (CB), and IB would be more affected than CB. Large commercial banks that use the repo market and commercial

paper should suffer more than banks with strong deposit networks. Hedge funds with short lockups and large outflows should suffer the

most. When liquidity shocks occur, cheaper alternatives to fire

sales used first:◦ Deposits and discount window for CB◦ Equity issuance or dividend cuts for CB and IB◦ Sale of assets that are least affected by crisis (cherrypicking to

boost equity)◦ Sale of liquid assets rather than illiquid ones

Identify crises and investigate changes in funding and assets at commercial banks (CB), I-banks (IB) and hedge funds:◦ Does financing for IB and CB decline in a crisis?

◦ Do IB and CB engage in fire sales?

When assets are sold, which ones?

◦ How do hedge funds respond to the crisis?

During crises, how much do funds with short lockup periods and large redemption requests (constrained funds) sell off compared to funds with long lockup periods and small redemption requests (unconstrained funds)

Commercial bank data from Compustat bank quarterly data 1980; I-bank data from 1980 but publicly traded I-banks limited in early part of sample◦ Only largest commercial banks (about 100 each quarter)

Hedge funds identified from TASS, matched with funds that report with13-f forms to SEC (Thomson-Reuters)◦ 13-f reports are quarterly◦ Start with data in 1998 to keep sufficient sample size

Identify crises from NBER recessions, bank failures, stock returns, flight to quality, known events like LTCM

Crisis and Boom Periods

Crisis 1/1980 - 11/1982

12/1988 - 12/1992

8/1998 - 1/1999

3/2001 - 11/2001

3/2007 - 12/2008   

Boom 11/1993 - 10/1997

6/1999 - 5/2000

1/2003 - 2/2004   

Funding Shocks at Commercial Banks    All

Low Deposit Banks

High Deposit Banks

   Period Ave Med Ave Med Ave Med

Net Debt Issuance/ TA Crisis 0.45% 0.27% 0.18% 0.04% 0.58% 0.26%Boom 0.96% 0.61% 1.02% 0.64% 0.88% 0.42%Diff. -0.50% -0.33% -0.84% -0.60% -0.30% -0.17%

Net Debt Issuance < 0 Crisis 43.11% 49.03% 39.91%Boom 36.32% 36.20% 33.71%Diff. 6.79% 12.83% 6.20%

Net L-T Debt Issuance/ TA Crisis 0.19% -0.00% 0.21% 0.00% 0.22% 0.00%Boom 0.56% 0.02% 0.73% 0.22% 0.43% 0.00%Diff. -0.38% -0.02% -0.52% -0.22% -0.21% 0.00%

Change in Deposits/ TA Crisis 1.69% 0.83% 1.79% 0.89% 1.71% 0.80%Boom 1.97% 0.78% 2.18% 0.96% 1.17% 0.37%Diff. -0.28% 0.05% -0.39% -0.07% 0.54% 0.43%

Change in Deposits < 0 Crisis 37.00% 34.85% 36.91%Boom 35.39% 29.82% 43.44%Diff. 1.61% 5.02% -6.53%

Funding Shocks at Commercial Banks    All

Low Equity Banks

High Equity Banks

   Period Ave Med Ave Med Ave Med

Net Debt Issuance/ TA Crisis 0.45% 0.27% 0.22% 0.07% 0.47% 0.26%Boom 0.96% 0.61% 1.34% 0.81% 0.88% 0.41%Diff. -0.50% -0.33% -1.12% -0.74% -0.41% -0.15%

Net Debt Issuance < 0 Crisis 43.11% 48.41% 42.36%Boom 36.32% 35.75% 31.91%Diff. 6.79% 12.66% 10.45%

Net L-T Debt Issuance/ TA Crisis 0.19% 0.00% 0.12% 0.00% 0.20% -0.00%Boom 0.56% 0.02% 0.86% 0.28% 0.47% 0.00%Diff. -0.38% -0.02% -0.74% -0.28% -0.27% -0.00%

Change in Deposits/ TA Crisis 1.69% 0.83% 1.02% 0.58% 2.00% 1.06%Boom 1.97% 0.78% 1.98% 0.99% 1.75% 0.78%Diff. -0.28% 0.05% -0.96% -0.41% 0.25% 0.27%

Change in Deposits < 0 Crisis 37.00% 39.74% 32.46%Boom 35.39% 34.67% 36.55%Diff. 1.61% 5.07% -4.09%

Asset Changes at Commercial Banks    All Banks Low Deposit Banks High Deposit Banks

   Period Ave Med Ave Med Ave MedChange in Assets Crisis 2.63% 1.49% 2.70% 1.42% 2.66% 1.35%

Boom 3.51% 1.82% 3.83% 2.17% 2.35% 1.27%

Diff. -0.87% -0.33% -1.13% -0.75% 0.31% 0.07% Change in Assets < 0 Crisis 32.23% 35.48% 29.61%

Boom 27.81% 24.76% 32.35%Diff. 4.42% 10.72% -2.74%

Change in Loans / TA Crisis 1.27% 0.78% 1.20% 0.66% 1.25% 0.70%Boom 2.25% 1.28% 2.12% 1.13% 1.98% 1.29%Diff. -0.99% -0.50% -0.92% -0.47% -0.72% -0.60%

Change in Loans < 0 Crisis 32.48% 36.94% 32.86%Boom 22.31% 22.93% 20.59%Diff. 10.16% 14.01% 12.27%

Net Charge-Offs/ TA Crisis 0.13% 0.08% 0.15% 0.08% 0.13% 0.08%Boom 0.09% 0.06% 0.11% 0.06% 0.07% 0.05%Diff. 0.04% 0.02% 0.04% 0.02% 0.06% 0.03%

Inv. Securities Gain/ CE Crisis 0.04% 0.00% 0.02% 0.00% 0.08% 0.00%Boom 0.09% 0.01% 0.15% 0.02% 0.06% 0.00%Diff. -0.05% -0.01% -0.13% -0.02% 0.02% -0.00%

Asset Changes at Commercial Banks    All Banks Low Equity Banks High Equity Banks

   Period Ave Med Ave Med Ave MedChange in Assets Crisis 2.63% 1.49% 1.78% 0.97% 3.04% 1.76%

Boom 3.51% 1.82% 3.75% 2.37% 3.14% 1.77%Diff. -0.87% -0.33% -1.98% -1.40% -0.10% -0.01%

Change in Assets < 0 Crisis 32.23% 39.89% 25.87%Boom 27.81% 28.26% 26.62%Diff. 4.42% 11.63% -0.75%

Change in Loans / TA Crisis 1.27% 0.78% 0.82% 0.58% 1.31% 0.77%Boom 2.25% 1.28% 2.22% 1.12% 2.05% 1.33%Diff. -0.99% -0.50% -1.40% -0.54% -0.74% -0.56%

Change in Loans < 0 Crisis 32.48% 37.50% 28.18%Boom 22.31% 24.69% 24.12%Diff. 10.16% 12.81% 4.06%

Net Charge-Offs/ TA Crisis 0.13% 0.08% 0.15% 0.08% 0.13% 0.08%Boom 0.09% 0.06% 0.10% 0.07% 0.11% 0.05%Diff. 0.04% 0.02% 0.05% 0.01% 0.02% 0.03%

Inv. Securities Gain/ CE Crisis 0.04% 0.00% -0.04% 0.00% 0.02% 0.01%Boom 0.09% 0.01% 0.19% 0.03% 0.05% 0.00%Diff. -0.05% -0.01% -0.23% -0.03% -0.03% -0.01%

FAS115 (1993), gain/loss account reflects actual sales of securities and write-downs of “available-for-sale” securities that are “other-than-temporarily-impaired” (OTTI). Reported in footnotes.

SEC filings in 2007 and 2008: ◦ 2007: Gain of $300 million = $1.9 billion gain on

sales and -$1.6 billion OTTI write-downs◦ 2008: Loss of $1.5 billion: $9.8 gain on sales and -

$11.3 billion in OTTI write-downs Also examine other gains and losses: net realized

gains of $3.0 billion in 2007 and $1.1 billion in 2008 Together, these results provide strong evidence of

cherrypicking in recent crisis.

Bank Divested Asset Gain ($b.) Date

JP Morgan Chase Paymentech Solutions 1.0 12/08 (credit card processor)Citigroup German banking operations 3.9 12/08

Merrill Lynch Bloomberg, L.P. 4.3 12/08

Bank of America Marsico Capital Management 1.5 12/07

PNC Hilliard Lyons 0.1 6/07 (asset management)

Equity Changes at Commercial Banks

   All Banks

Low Deposit Banks

High DepositBanks

   Period Ave Med Ave Med Ave Med

Net Equity Issuance / TA Crisis 0.13% 0.01% 0.12% 0.01% 0.18% 0.00%Boom 0.06% 0.00% 0.07% 0.00% 0.09% 0.00%

Diff. 0.07% 0.01% 0.05% 0.01% 0.09% 0.00%

Cash Dividend/ TA Crisis 0.08% 0.07% 0.06% 0.06% 0.09% 0.08%Boom 0.10% 0.09% 0.08% 0.07% 0.11% 0.11%

Diff. -0.02% -0.02% -0.02% -0.01% -0.02% -0.03%

Equity Changes at Commercial Banks

   All Banks

LowEquity Banks

High Equity Banks

   Period Ave Med Ave Med Ave Med

Net Equity Issuance / TA Crisis 0.13% 0.01% 0.12% 0.01% 0.15% 0.00%Boom 0.06% 0.00% 0.12% 0.01% 0.04% 0.00%

Diff. 0.07% 0.01% 0.00% 0.00% 0.11% 0.00%

Cash Dividend/ TA Crisis 0.08% 0.07% 0.05% 0.04% 0.11% 0.10%Boom 0.10% 0.09% 0.05% 0.05% 0.12% 0.12%

Diff. -0.02% -0.02% 0.00% -0.01% -0.01% -0.02%

Alternatives to Fire Sales at Commercial Banks

Frequency of ActionsDuring Crises

All Banks

1108/2874

Low Deposits294/724

High Deposits262/699

Low Equity 254/694

High Equity 294/720

Issued Equity 71%   73% 68% 72% 69% Increased Deposits 66%   67% 67% 63% 68% Sold Assets 53%   60% 47% 60% 47% Decreased Dividends 53%   51% 53% 46% 60%

 Debt Shortfall & No Equity Issuance 320   80 85 70 92 Increased Deposits 66%   64% 64% 64% 68% Sold Assets 55%   65% 52% 63% 58% Decreased Dividends 58%   50% 62% 53% 63%

 Debt Shortfall & No Equity Issuance & Deposits Decreased 109   29 31 25 29 Sold Assets 98%   93% 100% 96% 100% Decreased Dividends 61%   52% 55% 72% 52%

 

Alternatives to Fire Sales at Commercial Banks

Median Ratio of Dollars Raised to Shortfall During Crises

All Banks

1108/2874

Low Deposits294/724

High Deposits262/699

Low Equity 254/694

High Equity 294/720

Increased Deposits 72.4%   59.3% 99.7% 50.0% 98.0%

Used only deposits 492 109 131 99 145

Asset Sales 13.5%   42.2% -18.5% 43.7% -19.4%

Equity Issued 0.6%   0.4% 0.6% 0.7% 0.5%

Decreased Dividends 0.0%   0.0% 0.0% 0.0% 0.0%  

Increased Deposits Partially 243 89 45 62 56

Increased Deposits 49.9%   49.7% 52.9% 49.6% 53.4%

Asset Sales 41.0%   48.1% 41.0% 43.7% 46.0%

Equity Issued 0.3%   0.2% 0.3% 0.1% 0.0%

Decreased Dividends 0.0%   0.0% 0.0% 0.0% 0.0%

Decreased Deposits 373   96 86 93 93

Asset Sales 198.5%   185.5% 281.5% 176.8% 225.3%

Equity Issued 0.7%   0.5% 0.3% 1.2% 0.8%

 

Alternatives to Fire Sales at Commercial Banks

Median Ratio of Dollars Raised to Shortfall During 2007-2008 Crisis

AllBanks

126/300

Increased Deposits 84.3%

Used only deposits 59

Asset Sales -10.4%

Equity Issued 0.4%

Decreased Dividends 0.0%

Increased Deposits Partially 33

Increased Deposits 56.9%

Sold Assets 31.5%

Equity Issued 15.3%

Decreased Dividends 0.0%

Decreased Deposits 34

Sold Assets 195.5%

Equity Issued 1.7%

Alternatives to Fire Sales at Commercial Banks

Shortfalls During CrisesAll

Banks1108/2874

Low Deposits294/724

High Deposits262/699

Low Equity 254/694

High Equity 294/720

Average Debt Shortfall (millions) $1,575   $4,418 $158 $4,831 $205

Median Debt Shortfall (millions) $137 $407 $42 $458 $48

Average Assets (millions) $58,949   $139,700 $13,364 $137,831 $13,885

Changes in the RHS of Balance Sheet 80.6%   63.8% 108.7% 53.9% 106.0% (deposits, equity, dividends/debt)  

No Decline in Assets 515 115 138 105 150

Asset Sales 13.5%   42.2% -18.5% 43.7% -19.4%

Debt Shortfall Leads to Asset Sales 593   179 124 149 144

Asset Sales 128.9%   103.8% 187.0% 135.9% 126.3% Shortfall Met Completely with Asset Sales 347   94 83 90 83

Debt Issuance at Commercial Banks

Boom and 1/80 - 11/82

12/88 - 12/92

8/98 - 1/99

3/01 - 11/01

3/07 - 12/08 Crisis Crisis

Crisis 0.18Low Equity Bank -0.13 -0.13 -0.19 -0.19 -3.02 0.01 -0.31High Equity Bank -0.25 -0.25 -0.28 -0.23 -0.83 0.40 -0.03Net Charge-Offs 0.75 -0.70 -1.18 0.28 -0.02 1.35 -1.66Low Deposit Bank 0.29 -0.10 -0.42 0.29 -0.66 0.63 -0.76High Deposit Bank -0.08 -0.05 -0.09 0.07 -0.22 -0.59 0.12Change in Deposits -0.42 -0.11 -0.19 -0.26 -0.30 -0.42 -0.07Net Equity Issuance -0.24 -0.29 -0.66 -0.45 0.20 -0.46 -0.36Change in Loans 0.55 0.18 0.37 0.43 0.30 0.67 -0.11Change in Inv. Securities 0.55 0.54 0.54 0.42 0.78 0.57 0.76Inv. Securities Gain, Loss 1.62 -0.07 -3.03 1.49 6.66 8.25 0.30 Extraord and Discont. Items 15.27 0.82 16.74 -0.13 -1.50 -22.83 2.52 Crisis x :

Net Charge-Offs -1.45Low Deposit Bank -0.40High Deposit Bank 0.03Change in Deposits 0.31Net Equity Issuance -0.05Change in Loans -0.36

Change in Assets at Commercial Banks Boom and

1/80 - 11/82

12/88 - 12/92

8/98 - 1/99

3/01 - 11/01

3/07 - 12/08

Crisis CrisisCrisis -0.12Low Equity Bank -0.27 -0.27 -0.06 0.03 -1.43 0.08 1.20High Equity Bank 0.25 0.25 0.00 -0.02 0.13 0.03 1.02Net Charge-Offs -0.50 0.05 -0.95 -0.31 1.45 0.68 -0.98Low Deposit Bank -0.04 0.08 -0.04 -0.10 0.79 0.30 -0.53High Deposit Bank -0.02 -0.03 0.02 0.00 -0.30 -0.14 -0.04Change in Deposits 0.93 0.54 1.03 0.99 1.19 0.92 0.70Net Debt Issuance >0 0.87 0.68 1.02 0.99 1.11 0.99 0.47Net Debt Issuance <0 0.81 0.54 1.00 0.98 1.13 0.83 0.31Net Equity Issuance 0.96 0.67 0.68 0.76 0.61 0.77 1.01Change in Loans 0.17 0.70 0.02 0.09 -0.16 0.10 1.32Change in Inv. Securities 0.12 0.44 -0.01 0.05 -0.06 0.20 0.82Extraord and Discont. Items 1.77 -0.34 -0.39 0.09 -0.99 -1.61 -4.02 Crisis x :

Low Deposit Bank 0.12High Deposit Bank -0.02Change in Deposits -0.39Change in Loans 0.53Change in Inv. Securities 0.33

Equity Ratio Changes at Commercial Banks Boom and

1/80 - 11/82

12/88 - 12/92

8/98 - 1/99

3/01 - 11/01

3/07 - 12/08

Crisis CrisisCrisis 0.07Net Charge-Offs 0.22 -0.49 -0.24 -0.29 0.14 0.07 -1.23Low Deposit Bank 0.02 -0.03 0.01 0.01 0.18 -0.12 -0.11High Deposit Bank 0.00 0.00 0.02 -0.01 -0.10 -0.02 0.06Change in Deposits -0.06 -0.03 -0.05 -0.06 0.02 -0.05 -0.10Net Debt Issuance -0.06 -0.03 -0.05 -0.05 -0.02 -0.06 -0.03Net Equity Issuance 0.45 0.53 0.50 0.47 0.31 0.58 0.58Change in Dividends 0.24 -0.32 -0.19 -0.17 -0.41 -0.73 -0.30Change in Loans 0.05 -0.02 0.01 0.04 -0.05 -0.01 -0.06Change in Inv. Securities -0.01 -0.01 0.01 0.01 -0.01 0.01 0.01Inv. Securities Gain, Loss 0.03 0.96 0.28 0.12 -3.39 -0.69 1.18 Extraord and Discont. Items 1.32 0.91 1.05 0.76 -0.61 0.72 1.16 Crisis x :

Net Charge-Offs -0.72Low Deposit Bank -0.04High Deposit Bank 0.00Change in Deposits 0.04Net Debt Issuance 0.03Change in Dividend -0.56Change in Loans -0.07

Liquidity Shocks & Fire Sales at I-Banks    All Low S-T Debt High S-T Debt

   Period Ave Med Ave Med Ave Med

Net Debt Issuance / TA Crisis 1.13% 0.45% 0.48% 0.03% 1.95% 2.72%

Boom 2.31% 1.50% 1.85% 0.87% 2.76% 3.75%

Diff. -1.18% -1.05% -1.36% -0.84% -0.81% -1.02%

Net Debt Issuance < 0 Crisis 44.68% 50.00% 37.14%

Boom 29.76% 28.57% 29.13%

Diff. 14.92% 21.43% 8.02%

Net L-T Debt Issuance / TA Crisis 0.55% 0.18% 0.34% 0.05% 0.82% 0.32%

Boom 0.75% 0.54% 0.94% 0.33% 0.74% 0.65%

Diff. -0.20% -0.36% -0.60% -0.29% 0.08% -0.33%

Change in Assets Crisis 4.24% 1.92% 4.81% 1.17% 3.45% 3.11%

Boom 4.59% 3.65% 4.63% 2.69% 4.77% 4.91%

Diff. -0.35% -1.73% 0.18% -1.51% -1.32% -1.79%

Change in Fin. Instr. Owned /TA Crisis 0.17% 0.03% -0.69% -0.01% 1.44% 1.21%

Boom 1.33% 0.97% 0.57% 0.42% 1.72% 1.75%

Diff. -1.15% -0.93% -1.25% -0.43% -0.28% -0.54%

Change in Fin. Instr. Owned < 0 Crisis 45.79% 51.43% 39.05%

Boom 30.87% 29.55% 30.10%

Diff. 14.92% 21.88% 8.95%

Liquidity Shocks & Fire Sales at I-Banks    All Low S-T Debt High S-T Debt

   Period Ave Med Ave Med Ave MedChange in Cash & S-T Inv. Crisis 0.77% 0.20% 0.07% 0.02% 1.42% 0.23%

Boom 0.91% 0.56% 0.25% 0.25% 1.13% 0.84%Diff. -0.14% -0.36% -0.18% -0.23% 0.29% -0.61%

Change in Trading Assets Crisis 1.31% 0.86% 2.31% 0.50% 0.21% 1.57%Boom 1.88% 1.07% 2.46% 0.71% 1.84% 1.74%Diff. -0.57% -0.21% -0.15% -0.21% -1.63% -0.17%

Net Equity Issued Crisis 0.04% -0.01% 0.09% 0.00% -0.01% -0.03%Boom -0.02% -0.03% 0.00% -0.03% -0.04% -0.04%Diff. 0.06% 0.02% 0.08% 0.03% 0.03% 0.01%

Dividends Crisis 0.05% 0.03% 0.06% 0.02% 0.03% 0.03%Boom 0.03% 0.03% 0.04% 0.03% 0.02% 0.02%Diff. 0.02% 0.00% 0.02% -0.01% 0.01% 0.01%

Extra. Items Crisis 0.00% 0.00% 0.00%Boom -0.02% 0.06% -0.07%Diff. 0.02% -0.06% 0.07%

Debt Issuance at I-BanksBoom and

12/88 - 12/92 3/07 - 12/08 Crisis CrisisCrisis 5.17Net Charge-Offs 16.41 -7.49 -5.78 -11.25

High S-T Debt Banks -0.45 0.60 1.56 -0.58

Net Equity Issuance -2.18 -1.14 -3.56 -1.21Finc'l Instr. Owned 0.08 -0.06 -0.11 -0.02Change in Finc'l Instr. Owned 1.03 1.01 1.30 0.58Change in Trading Related Assets 0.52 0.20 0.15 0.41Extraord and Discont. Items -3.91 -2.05 -6.18 5.18

Crisis x :Net Charge-Offs -23.90High S-T Debt Banks 1.04Net Equity Issuance 1.04Finc'l Instr. Owned -0.14Change in Finc'l Instr. Owned -0.02Change in Trading Related Assets -0.32Extraord and Discont. Items 1.86

Changes in Assets at I-BanksBoom and

12/88 - 12/92 3/07 - 12/08

Crisis CrisisCrisis 0.31 Net Charge-Offs 2.80 1.42 1.48 41.22High S-T Debt Banks 0.50 1.23 1.20 2.63Net Debt Issuance > 0 0.30 0.70 1.00 -0.12Net Debt Issuance < 0 -0.01 0.95 0.99 0.86Net Equity Issuance -0.96 1.28 1.49 1.02Change in Finc'l Instr. Owned 0.86 0.54 0.07 0.83Change in Trading Related Assets 0.79 0.25 0.09 0.84Extraord and Discont. Items 22.44 -17.78 1.42 -47.44Crisis x :

Net Charge-Offs -1.35High S-T Debt Banks 0.72Net Debt Issuance > 0 0.40Net Debt Issuance < 0 0.96Net Equity Issuance 2.25Finc'l Instr. Owned(t-1) -0.01Change in Finc'l Instr. Owned -0.32Change in Trading Related Assets -0.54Extraord and Discont. Items -38.15

Change in Equity Ratio at I-Banks Boom and

12/88 - 12/92 3/07 - 12/08

Crisis CrisisCrisis 0.08Net Charge-Offs -0.63 -0.29 -0.12 -1.43

High S-T Debt Banks 0.03 -0.12 -0.08 -0.17

Net Debt Issuance 0.01 -0.04 -0.05 -0.08Net Equity Issuance 0.16 0.47 0.40 0.38Change in Dividend 0.00 0.68 6.05 0.86Finc'l Instr. Owned 0.00 0.00 0.00 0.00Change in Finc'l Instr. Owned -0.03 -0.06 0.02 -0.14Change in Trading Related Assets -0.01 0.00 0.00 0.04Extraord and Discont. Items -0.38 -10.51 -8.46 -10.56Crisis x :

Net Charge-Offs 0.34High S-T Debt Banks -0.14Net Debt Issuance -0.04Net Equity Issuance 0.31Change in Dividend 0.67Finc'l Instr. Owned(t-1) 0.01Extraord and Discont. Items -10.12

Hedge Fund Flows and Performance

   All

Constrained Hedge Funds

Unconstrained Hedge Funds

Difference: Con. – Un.

    Ave Median Ave Median Ave Median Ave MedianFund Quarterly Flow Crisis 0.00 0.01 -0.14 -0.07 0.03 0.03 -0.17 -0.10

Boom 0.03 0.01 -0.11 -0.05 0.06 0.04 -0.17 -0.09Diff -0.03 -0.00 -0.03 -0.02 -0.03 -0.01

Fund Quarterly Return Crisis 0.00 0.01 -0.02 -0.01 0.09 0.04 -0.11 -0.05Boom 0.05 0.03 0.04 0.02 0.13 0.07 -0.09 -0.06Diff -0.05 -0.02 -0.06 -0.03 -0.04 -0.03

Characteristics of Stocks held by Hedge Funds

   All

Constrained Hedge Funds

Unconstrained Hedge Funds

Difference: Cons. – Uncons.

    Ave Median Ave Median Ave Median Ave MedianPrior Year Annual Return Crisis 0.00 -0.05 -0.01 -0.05 0.08 0.05 -0.09 -0.10

Boom 0.11 -0.07 0.11 -0.09 0.32 0.03 -0.21 -0.12Diff -0.11 0.02 -0.12 0.04 -0.24 0.02

Total Assets ($ Million) Crisis 5,324 704 7,553 1,145 13,481 2,191 -5,928 -1,046Boom 5,488 577 8,342 1,331 11,005 1,719 -2,663 -388Diff -164 127 -789 -186 2,476 472

Tobin’s Q Crisis 2.93 1.72 2.83 1.77 3.23 2.03 -0.40 -0.30Boom 3.66 1.81 3.91 1.94 4.39 2.06 -0.50 -0.10Diff -0.73 -0.09 -1.08 -0.17 -1.16 -0.03

Market Cap, Prior Qtr. Crisis 12,625 1,957 10,928 1,891 17,448 2,569 -6,520 -679Boom 10,551 1,394 10,643 1,548 13,796 1,681 -3,153 -133Diff 2,074 563 285 343 3,652 888

Amihud Illiquidity*106 Crisis 0.15 0.02 0.07 0.06 0.05 0.03 0.03 0.03Boom 0.09 0.10 0.01 0.05 0.01 0.03 0.02 0.01Diff 0.06 -0.08 0.00 0.01 0.04 -0.00

Bid/Ask Spread Crisis 0.013 0.004 0.010 0.003 0.006 0.003 0.004 0.001Boom 0.012 0.012 0.011 0.011 0.009 0.010 0.002 0.001Diff 0.001 -0.008 -0.001 -0.008 -0.003 -0.007

Hedge Fund Sales and Purchases

   All Families

Constrained Hedge Funds

Unconstrained Hedge Funds

Difference: Cons. – Uncons.

Proportion Unchanged Crisis 0.12 0.10 0.23 -0.12Boom 0.15 0.15 0.19 -0.04Diff -0.03 -0.05 0.03

Proportion Sold Crisis 0.42 0.49 0.28 0.21Boom 0.41 0.43 0.34 0.09Diff 0.01 0.06 -0.06

Proportion with Increases Crisis 0.24 0.19 0.28 -0.09Boom 0.23 0.21 0.26 -0.04Diff 0.01 -0.02 0.02

Increase in Existing Holdings Crisis 0.15 0.16 0.14 0.02Boom 0.14 0.12 0.15 -0.03Diff 0.01 0.04 -0.01

Characteristics of Stocks Sold and Not Sold by Hedge Funds

Sold Not Sold Difference:

   Period Cons. Uncons.

Diff.: Cons.-

Uncons. Cons. Uncons.

Diff.: Cons. –

Unc.

Sold - Not Sold

(Cons.)

Sold - Not Sold (Unc.)

Prior Year Return Crisis -0.01 0.08 -0.09 0.02 0.09 -0.07 -0.03 -0.01Boom 0.11 0.39 -0.28 0.08 0.25 -0.17 0.03 0.14Diff -0.12 -0.31 -0.06 -0.16

Market Cap. Crisis 8,162 17,448 -9,286 9,079 20,367-

11,288 -917 -2,919Boom 8,054 13,796 -5,742 8,445 14,466 -6,021 -391 -670Diff 108 3,652 643 5,901

Amihud Illiquidity Crisis 0.08 0.05 0.03 0.06 0.04 0.03 0.01 0.01Boom 0.06 0.05 0.01 0.08 0.07 0.02 -0.03 -0.02Diff 0.02 0.00 -0.02 -0.03

Bid/Ask Spread Crisis 0.01 0.01 0.00 0.01 0.01 0.01 0.00 0.00Boom 0.01 0.01 0.00 0.01 0.01 0.00 0.00 0.00Diff -0.00 -0.00 0.00 -0.00

Figure 1: Stocks Sold and Not Sold

Liquidity shocks do not appear to trigger financial crises:◦ Debt issuance does not fall in crises at commercial banks and

I-banks ST debt (repo borrowing) does not drop off a cliff

◦ Deposits rise – deposits are likely cheapest funding alternative◦ Equity issuance increases◦ Creditworthiness appears to affect borrowing and deposits in a

crisis Fire sales do not appear to amplify crises

◦ Assets do not drop on average and few banks only sell assets◦ Asset declines likely reflect revaluations◦ Strong evidence of cherrypicking in most recent crisis◦ Constrained hedge funds buy more stock!