Nicole Boyson
Northeastern University
Jean Helwege
University of South Carolina
Jan Jindra
Menlo 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
High Deposit
Banks
Ave
Med
0.58%
0.26%
0.88%
0.42%
-0.30% -0.17%
49.03%
36.20%
12.83%
39.91%
33.71%
6.20%
Period
Crisis
Boom
Diff.
Ave
0.45%
0.96%
-0.50%
Crisis
Boom
Diff.
43.11%
36.32%
6.79%
Net L-T Debt Issuance/ TA Crisis
Boom
Diff.
0.19%
0.56%
-0.38%
-0.00%
0.02%
-0.02%
0.21%
0.73%
-0.52%
0.00%
0.22%
-0.22%
0.22%
0.43%
-0.21%
0.00%
0.00%
0.00%
Change in Deposits/ TA
Crisis
Boom
Diff.
1.69%
1.97%
-0.28%
0.83%
0.78%
0.05%
1.79%
2.18%
-0.39%
0.89%
0.96%
-0.07%
1.71%
1.17%
0.54%
0.80%
0.37%
0.43%
Change in Deposits < 0
Crisis
Boom
Diff.
37.00%
35.39%
1.61%
Net Debt Issuance/ TA
Net Debt Issuance < 0
Med
0.27%
0.61%
-0.33%
Low Deposit
Banks
Ave
Med
0.18% 0.04%
1.02%
0.64%
-0.84% -0.60%
34.85%
29.82%
5.02%
36.91%
43.44%
-6.53%
Funding Shocks at Commercial Banks
All
High Equity
Banks
Ave
Med
0.47%
0.26%
0.88%
0.41%
-0.41% -0.15%
48.41%
35.75%
12.66%
42.36%
31.91%
10.45%
Period
Crisis
Boom
Diff.
Ave
0.45%
0.96%
-0.50%
Crisis
Boom
Diff.
43.11%
36.32%
6.79%
Net L-T Debt Issuance/ TA Crisis
Boom
Diff.
0.19%
0.56%
-0.38%
0.00%
0.02%
-0.02%
0.12%
0.86%
-0.74%
0.00%
0.28%
-0.28%
0.20%
0.47%
-0.27%
-0.00%
0.00%
-0.00%
Change in Deposits/ TA
Crisis
Boom
Diff.
1.69%
1.97%
-0.28%
0.83%
0.78%
0.05%
1.02%
1.98%
-0.96%
0.58%
0.99%
-0.41%
2.00%
1.75%
0.25%
1.06%
0.78%
0.27%
Change in Deposits < 0
Crisis
Boom
Diff.
37.00%
35.39%
1.61%
Net Debt Issuance/ TA
Net Debt Issuance < 0
Med
0.27%
0.61%
-0.33%
Low Equity
Banks
Ave
Med
0.22%
0.07%
1.34%
0.81%
-1.12% -0.74%
39.74%
34.67%
5.07%
32.46%
36.55%
-4.09%
Asset Changes at Commercial Banks
Change in Assets
Change in Assets < 0
Change in Loans / TA
Change in Loans < 0
Net Charge-Offs/ TA
Inv. Securities Gain/ CE
Period
Crisis
Boom
All Banks
Ave
Med
2.63%
1.49%
3.51%
1.82%
Low Deposit Banks
Ave
Med
2.70%
1.42%
3.83%
2.17%
High Deposit Banks
Ave
Med
2.66%
1.35%
2.35%
1.27%
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
-0.87%
32.23%
27.81%
4.42%
1.27%
2.25%
-0.99%
32.48%
22.31%
10.16%
0.13%
0.09%
0.04%
0.04%
0.09%
-0.05%
-1.13%
35.48%
24.76%
10.72%
1.20%
2.12%
-0.92%
36.94%
22.93%
14.01%
0.15%
0.11%
0.04%
0.02%
0.15%
-0.13%
0.31%
29.61%
32.35%
-2.74%
1.25%
1.98%
-0.72%
32.86%
20.59%
12.27%
0.13%
0.07%
0.06%
0.08%
0.06%
0.02%
-0.33%
0.78%
1.28%
-0.50%
0.08%
0.06%
0.02%
0.00%
0.01%
-0.01%
-0.75%
0.66%
1.13%
-0.47%
0.08%
0.06%
0.02%
0.00%
0.02%
-0.02%
0.07%
0.70%
1.29%
-0.60%
0.08%
0.05%
0.03%
0.00%
0.00%
-0.00%
Asset Changes at Commercial Banks
Change in Assets
Change in Assets < 0
Change in Loans / TA
Change in Loans < 0
Net Charge-Offs/ TA
Inv. Securities Gain/ CE
Period
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
All Banks
Ave
Med
2.63%
1.49%
3.51%
1.82%
-0.87%
-0.33%
32.23%
27.81%
4.42%
1.27%
0.78%
2.25%
1.28%
-0.99%
-0.50%
32.48%
22.31%
10.16%
0.13%
0.08%
0.09%
0.06%
0.04%
0.02%
0.04%
0.00%
0.09%
0.01%
-0.05%
-0.01%
Low Equity Banks
Ave
Med
1.78%
0.97%
3.75%
2.37%
-1.98%
-1.40%
39.89%
28.26%
11.63%
0.82%
0.58%
2.22%
1.12%
-1.40%
-0.54%
37.50%
24.69%
12.81%
0.15%
0.08%
0.10%
0.07%
0.05%
0.01%
-0.04%
0.00%
0.19%
0.03%
-0.23%
-0.03%
High Equity Banks
Ave
Med
3.04%
1.76%
3.14%
1.77%
-0.10%
-0.01%
25.87%
26.62%
-0.75%
1.31%
0.77%
2.05%
1.33%
-0.74%
-0.56%
28.18%
24.12%
4.06%
0.13%
0.08%
0.11%
0.05%
0.02%
0.03%
0.02%
0.01%
0.05%
0.00%
-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
(credit card processor)
1.0
12/08
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
(asset management)
0.1
6/07
Equity Changes at Commercial Banks
Period
Net Equity Issuance / TA Crisis
Boom
Cash Dividend/ TA
All Banks
Ave
Med
Low Deposit
Banks
Ave
Med
High Deposit
Banks
Ave
Med
0.13%
0.06%
0.01%
0.00%
0.12%
0.07%
0.01%
0.00%
0.18%
0.09%
0.00%
0.00%
Diff.
0.07%
0.01%
0.05%
0.01%
0.09%
0.00%
Crisis
Boom
0.08%
0.10%
0.07%
0.09%
0.06%
0.08%
0.06%
0.07%
0.09%
0.11%
0.08%
0.11%
Diff.
-0.02%
-0.02%
-0.02%
-0.01%
-0.02%
-0.03%
Equity Changes at Commercial Banks
Period
Net Equity Issuance / TA Crisis
Boom
Cash Dividend/ TA
All Banks
Ave
Med
Low
Equity Banks
Ave
Med
High
Equity Banks
Ave
Med
0.13%
0.06%
0.01%
0.00%
0.12%
0.12%
0.01%
0.01%
0.15%
0.04%
0.00%
0.00%
Diff.
0.07%
0.01%
0.00%
0.00%
0.11%
0.00%
Crisis
Boom
0.08%
0.10%
0.07%
0.09%
0.05%
0.05%
0.04%
0.05%
0.11%
0.12%
0.10%
0.12%
Diff.
-0.02%
-0.02%
0.00%
-0.01%
-0.01%
-0.02%
Alternatives to Fire Sales at Commercial Banks
Frequency of Actions
During Crises
Issued Equity
Increased Deposits
Sold Assets
Decreased Dividends
All
Low
Banks
Deposits
1108/2874 294/724
High
Deposits
262/699
Low
Equity
254/694
High
Equity
294/720
71%
66%
53%
53%
73%
67%
60%
51%
68%
67%
47%
53%
72%
63%
60%
46%
69%
68%
47%
60%
Debt Shortfall & No Equity Issuance
Increased Deposits
Sold Assets
Decreased Dividends
320
66%
55%
58%
80
64%
65%
50%
85
64%
52%
62%
70
64%
63%
53%
92
68%
58%
63%
Debt Shortfall & No Equity Issuance
& Deposits Decreased
Sold Assets
Decreased Dividends
109
98%
61%
29
93%
52%
31
100%
55%
25
96%
72%
29
100%
52%
Alternatives to Fire Sales at Commercial Banks
Median Ratio of Dollars Raised to
Shortfall During Crises
Increased Deposits
Used only deposits
Asset Sales
Equity Issued
Decreased Dividends
All
Low
Banks
Deposits
1108/2874 294/724
High
Deposits
262/699
Low
Equity
254/694
High
Equity
294/720
72.4%
492
13.5%
0.6%
0.0%
59.3%
109
42.2%
0.4%
0.0%
99.7%
131
-18.5%
0.6%
0.0%
50.0%
99
43.7%
0.7%
0.0%
98.0%
145
-19.4%
0.5%
0.0%
Increased Deposits Partially
Increased Deposits
Asset Sales
Equity Issued
243
49.9%
41.0%
0.3%
89
49.7%
48.1%
0.2%
45
52.9%
41.0%
0.3%
62
49.6%
43.7%
0.1%
56
53.4%
46.0%
0.0%
Decreased Dividends
0.0%
0.0%
0.0%
0.0%
0.0%
373
198.5%
0.7%
96
185.5%
0.5%
86
281.5%
0.3%
93
176.8%
1.2%
93
225.3%
0.8%
Decreased Deposits
Asset Sales
Equity Issued
Alternatives to Fire Sales at Commercial Banks
Median Ratio of Dollars Raised to Shortfall
During 2007-2008 Crisis
Increased Deposits
Used only deposits
Asset Sales
Equity Issued
Decreased Dividends
All
Banks
126/300
84.3%
59
-10.4%
0.4%
0.0%
Increased Deposits Partially
Increased Deposits
Sold Assets
Equity Issued
33
56.9%
31.5%
15.3%
Decreased Dividends
0.0%
Decreased Deposits
Sold Assets
Equity Issued
34
195.5%
1.7%
Alternatives to Fire Sales at Commercial Banks
Shortfalls During Crises
Average Debt Shortfall (millions)
Median Debt Shortfall (millions)
Average Assets (millions)
Changes in the RHS of Balance Sheet
(deposits, equity, dividends/debt)
No Decline in Assets
Asset Sales
Debt Shortfall Leads to Asset Sales
Asset Sales
Shortfall Met Completely
with Asset Sales
All
Low
Banks
Deposits
1108/2874 294/724
High
Deposits
262/699
Low
Equity
254/694
High
Equity
294/720
$1,575
$137
$58,949
$4,418
$407
$139,700
$158
$42
$13,364
$4,831
$458
$137,831
$205
$48
$13,885
80.6%
63.8%
108.7%
53.9%
106.0%
515
13.5%
115
42.2%
138
-18.5%
105
43.7%
150
-19.4%
593
128.9%
179
103.8%
124
187.0%
149
135.9%
144
126.3%
347
94
83
90
83
Debt Issuance at Commercial Banks
Boom and
Crisis
Crisis
0.18
Low Equity Bank
-0.13
High Equity Bank
-0.25
Net Charge-Offs
0.75
Low Deposit Bank
0.29
High Deposit Bank
-0.08
Change in Deposits
-0.42
Net Equity Issuance
-0.24
Change in Loans
0.55
Change in Inv. Securities
0.55
Inv. Securities Gain, Loss
1.62
Extraord and Discont. Items
15.27
Crisis x :
Net Charge-Offs
-1.45
Low Deposit Bank
-0.40
High Deposit Bank
0.03
Change in Deposits
0.31
Net Equity Issuance
-0.05
Change in Loans
-0.36
Crisis
1/80 11/82
-0.13
-0.25
-0.70
-0.10
-0.05
-0.11
-0.29
0.18
0.54
-0.07
0.82
-0.19
-0.28
-1.18
-0.42
-0.09
-0.19
-0.66
0.37
0.54
-3.03
16.74
12/88 12/92
8/98 1/99
3/01 11/01
3/07 12/08
-0.19
-0.23
0.28
0.29
0.07
-0.26
-0.45
0.43
0.42
1.49
-0.13
-3.02
-0.83
-0.02
-0.66
-0.22
-0.30
0.20
0.30
0.78
6.66
-1.50
0.01
0.40
1.35
0.63
-0.59
-0.42
-0.46
0.67
0.57
8.25
-22.83
-0.31
-0.03
-1.66
-0.76
0.12
-0.07
-0.36
-0.11
0.76
0.30
2.52
Change in Assets at Commercial Banks
Boom and
Crisis
Crisis
-0.12
Low Equity Bank
-0.27
High Equity Bank
0.25
Net Charge-Offs
-0.50
Low Deposit Bank
-0.04
High Deposit Bank
-0.02
Change in Deposits
0.93
Net Debt Issuance >0
0.87
Net Debt Issuance <0
0.81
Net Equity Issuance
0.96
Change in Loans
0.17
Change in Inv. Securities
0.12
Extraord and Discont. Items
1.77
Crisis x :
Low Deposit Bank
0.12
High Deposit Bank
-0.02
Change in Deposits
-0.39
Change in Loans
0.53
Change in Inv. Securities
0.33
Crisis
1/80 11/82
-0.27
0.25
0.05
0.08
-0.03
0.54
0.68
0.54
0.67
0.70
0.44
-0.34
-0.06
0.00
-0.95
-0.04
0.02
1.03
1.02
1.00
0.68
0.02
-0.01
-0.39
12/88 12/92
8/98 1/99
3/01 11/01
3/07 12/08
0.03
-0.02
-0.31
-0.10
0.00
0.99
0.99
0.98
0.76
0.09
0.05
0.09
-1.43
0.13
1.45
0.79
-0.30
1.19
1.11
1.13
0.61
-0.16
-0.06
-0.99
0.08
0.03
0.68
0.30
-0.14
0.92
0.99
0.83
0.77
0.10
0.20
-1.61
1.20
1.02
-0.98
-0.53
-0.04
0.70
0.47
0.31
1.01
1.32
0.82
-4.02
Equity Ratio Changes at Commercial Banks
Boom and
Crisis
Crisis
0.07
Net Charge-Offs
0.22
Low Deposit Bank
0.02
High Deposit Bank
0.00
Change in Deposits
-0.06
Net Debt Issuance
-0.06
Net Equity Issuance
0.45
Change in Dividends
0.24
Change in Loans
0.05
Change in Inv. Securities
-0.01
Inv. Securities Gain, Loss
0.03
Extraord and Discont. Items
1.32
Crisis x :
Net Charge-Offs
-0.72
Low Deposit Bank
-0.04
High Deposit Bank
0.00
Change in Deposits
0.04
Net Debt Issuance
0.03
Change in Dividend
-0.56
Change in Loans
-0.07
Crisis
1/80 11/82
-0.49
-0.03
0.00
-0.03
-0.03
0.53
-0.32
-0.02
-0.01
0.96
0.91
-0.24
0.01
0.02
-0.05
-0.05
0.50
-0.19
0.01
0.01
0.28
1.05
12/88 12/92
8/98 1/99
3/01 11/01
3/07 12/08
-0.29
0.01
-0.01
-0.06
-0.05
0.47
-0.17
0.04
0.01
0.12
0.76
0.14
0.18
-0.10
0.02
-0.02
0.31
-0.41
-0.05
-0.01
-3.39
-0.61
0.07
-0.12
-0.02
-0.05
-0.06
0.58
-0.73
-0.01
0.01
-0.69
0.72
-1.23
-0.11
0.06
-0.10
-0.03
0.58
-0.30
-0.06
0.01
1.18
1.16
Liquidity Shocks & Fire Sales at I-Banks
All
Net Debt Issuance / TA
Net Debt Issuance < 0
Net L-T Debt Issuance / TA
Change in Assets
Change in Fin. Instr. Owned /TA
Change in Fin. Instr. Owned < 0
Period
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Ave
1.13%
2.31%
-1.18%
44.68%
29.76%
14.92%
0.55%
0.75%
-0.20%
4.24%
4.59%
-0.35%
0.17%
1.33%
-1.15%
45.79%
30.87%
14.92%
Low S-T Debt
Med
0.45%
1.50%
-1.05%
0.18%
0.54%
-0.36%
1.92%
3.65%
-1.73%
0.03%
0.97%
-0.93%
Ave
0.48%
1.85%
-1.36%
50.00%
28.57%
21.43%
0.34%
0.94%
-0.60%
4.81%
4.63%
0.18%
-0.69%
0.57%
-1.25%
51.43%
29.55%
21.88%
Med
0.03%
0.87%
-0.84%
0.05%
0.33%
-0.29%
1.17%
2.69%
-1.51%
-0.01%
0.42%
-0.43%
High S-T Debt
Ave
1.95%
2.76%
-0.81%
37.14%
29.13%
8.02%
0.82%
0.74%
0.08%
3.45%
4.77%
-1.32%
1.44%
1.72%
-0.28%
39.05%
30.10%
8.95%
Med
2.72%
3.75%
-1.02%
0.32%
0.65%
-0.33%
3.11%
4.91%
-1.79%
1.21%
1.75%
-0.54%
Liquidity Shocks & Fire Sales at I-Banks
All
Change in Cash & S-T Inv.
Change in Trading Assets
Net Equity Issued
Dividends
Extra. Items
Period
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Crisis
Boom
Diff.
Ave
0.77%
0.91%
-0.14%
1.31%
1.88%
-0.57%
0.04%
-0.02%
0.06%
0.05%
0.03%
0.02%
0.00%
-0.02%
0.02%
Low S-T Debt
Med
0.20%
0.56%
-0.36%
0.86%
1.07%
-0.21%
-0.01%
-0.03%
0.02%
0.03%
0.03%
0.00%
Ave
0.07%
0.25%
-0.18%
2.31%
2.46%
-0.15%
0.09%
0.00%
0.08%
0.06%
0.04%
0.02%
0.00%
0.06%
-0.06%
Med
0.02%
0.25%
-0.23%
0.50%
0.71%
-0.21%
0.00%
-0.03%
0.03%
0.02%
0.03%
-0.01%
High S-T Debt
Ave
1.42%
1.13%
0.29%
0.21%
1.84%
-1.63%
-0.01%
-0.04%
0.03%
0.03%
0.02%
0.01%
0.00%
-0.07%
0.07%
Med
0.23%
0.84%
-0.61%
1.57%
1.74%
-0.17%
-0.03%
-0.04%
0.01%
0.03%
0.02%
0.01%
Debt Issuance at I-Banks
Crisis
Net Charge-Offs
High S-T Debt Banks
Net Equity Issuance
Finc'l Instr. Owned
Change in Finc'l Instr. Owned
Change in Trading Related Assets
Extraord and Discont. Items
Crisis x :
Net Charge-Offs
High S-T Debt Banks
Net Equity Issuance
Finc'l Instr. Owned
Change in Finc'l Instr. Owned
Change in Trading Related Assets
Extraord and Discont. Items
Boom and
Crisis
5.17
16.41
-0.45
-2.18
0.08
1.03
0.52
-3.91
-23.90
1.04
1.04
-0.14
-0.02
-0.32
1.86
Crisis
-7.49
0.60
-1.14
-0.06
1.01
0.20
-2.05
12/88 - 12/92 3/07 - 12/08
-5.78
1.56
-3.56
-0.11
1.30
0.15
-6.18
-11.25
-0.58
-1.21
-0.02
0.58
0.41
5.18
Changes in Assets at I-Banks
Crisis
Net Charge-Offs
High S-T Debt Banks
Net Debt Issuance > 0
Net Debt Issuance < 0
Net Equity Issuance
Change in Finc'l Instr. Owned
Change in Trading Related Assets
Extraord and Discont. Items
Crisis x :
Net Charge-Offs
High S-T Debt Banks
Net Debt Issuance > 0
Net Debt Issuance < 0
Net Equity Issuance
Finc'l Instr. Owned(t-1)
Change in Finc'l Instr. Owned
Change in Trading Related Assets
Extraord and Discont. Items
Boom and
Crisis
0.31
2.80
0.50
0.30
-0.01
-0.96
0.86
0.79
22.44
-1.35
0.72
0.40
0.96
2.25
-0.01
-0.32
-0.54
-38.15
Crisis
12/88 12/92
1.42
1.23
0.70
0.95
1.28
0.54
0.25
-17.78
1.48
1.20
1.00
0.99
1.49
0.07
0.09
1.42
3/07 - 12/08
41.22
2.63
-0.12
0.86
1.02
0.83
0.84
-47.44
Change in Equity Ratio at I-Banks
Crisis
Net Charge-Offs
High S-T Debt Banks
Net Debt Issuance
Net Equity Issuance
Change in Dividend
Finc'l Instr. Owned
Change in Finc'l Instr. Owned
Change in Trading Related Assets
Extraord and Discont. Items
Crisis x :
Net Charge-Offs
High S-T Debt Banks
Net Debt Issuance
Net Equity Issuance
Change in Dividend
Finc'l Instr. Owned(t-1)
Extraord and Discont. Items
Boom and
Crisis
0.08
-0.63
0.03
0.01
0.16
0.00
0.00
-0.03
-0.01
-0.38
0.34
-0.14
-0.04
0.31
0.67
0.01
-10.12
Crisis
-0.29
-0.12
-0.04
0.47
0.68
0.00
-0.06
0.00
-10.51
12/88 12/92
-0.12
-0.08
-0.05
0.40
6.05
0.00
0.02
0.00
-8.46
3/07 - 12/08
-1.43
-0.17
-0.08
0.38
0.86
0.00
-0.14
0.04
-10.56
Hedge Fund Flows and Performance
Constrained
Hedge Funds
Ave Median Ave
Median
0.00
0.01
-0.14
-0.07
0.03
0.01
-0.11
-0.05
-0.03 -0.00 -0.03
-0.02
0.00
0.01
-0.02
-0.01
0.05
0.03
0.04
0.02
-0.05 -0.02 -0.06
-0.03
All
Fund Quarterly Flow
Fund Quarterly Return
Crisis
Boom
Diff
Crisis
Boom
Diff
Unconstrained
Hedge Funds
Ave Median
0.03
0.03
0.06
0.04
-0.03
-0.01
0.09
0.04
0.13
0.07
-0.04
-0.03
Difference:
Con. – Un.
Ave
Median
-0.17
-0.10
-0.17
-0.09
-0.11
-0.09
-0.05
-0.06
Characteristics of Stocks held by
Hedge Funds
All
Prior Year Annual Return
Total Assets ($ Million)
Tobin’s Q
Market Cap, Prior Qtr.
Amihud Illiquidity*106
Bid/Ask Spread
Crisis
Boom
Diff
Crisis
Boom
Diff
Crisis
Boom
Diff
Crisis
Boom
Diff
Crisis
Boom
Diff
Crisis
Boom
Diff
Ave
0.00
0.11
-0.11
5,324
5,488
-164
2.93
3.66
-0.73
12,625
10,551
2,074
0.15
0.09
0.06
0.013
0.012
0.001
Median
-0.05
-0.07
0.02
704
577
127
1.72
1.81
-0.09
1,957
1,394
563
0.02
0.10
-0.08
0.004
0.012
-0.008
Constrained
Hedge Funds
Ave
Median
-0.01
-0.05
0.11
-0.09
-0.12
0.04
7,553
1,145
8,342
1,331
-789
-186
2.83
1.77
3.91
1.94
-1.08
-0.17
10,928
1,891
10,643
1,548
285
343
0.07
0.06
0.01
0.05
0.00
0.01
0.010
0.003
0.011
0.011
-0.001
-0.008
Unconstrained
Hedge Funds
Ave
Median
0.08
0.05
0.32
0.03
-0.24
0.02
13,481
2,191
11,005
1,719
2,476
472
3.23
2.03
4.39
2.06
-1.16
-0.03
17,448
2,569
13,796
1,681
3,652
888
0.05
0.03
0.01
0.03
0.04
-0.00
0.006
0.003
0.009
0.010
-0.003
-0.007
Difference:
Cons. – Uncons.
Ave
Median
-0.09
-0.10
-0.21
-0.12
-5,928
-2,663
-1,046
-388
-0.40
-0.50
-0.30
-0.10
-6,520
-3,153
-679
-133
0.03
0.02
0.03
0.01
0.004
0.002
0.001
0.001
Hedge Fund Sales and Purchases
Proportion Unchanged
Proportion Sold
Proportion with Increases
Increase in Existing Holdings
Crisis
Boom
Diff
Crisis
Boom
Diff
Crisis
Boom
Diff
Crisis
Boom
Diff
All Families
Constrained
Hedge Funds
0.12
0.15
-0.03
0.42
0.41
0.01
0.24
0.23
0.01
0.15
0.14
0.01
0.10
0.15
-0.05
0.49
0.43
0.06
0.19
0.21
-0.02
0.16
0.12
0.04
Unconstrained
Difference:
Hedge Funds Cons. – Uncons.
0.23
0.19
0.03
0.28
0.34
-0.06
0.28
0.26
0.02
0.14
0.15
-0.01
-0.12
-0.04
0.21
0.09
-0.09
-0.04
0.02
-0.03
Characteristics of Stocks Sold and Not Sold
by Hedge Funds
Sold
Period
Prior Year Return Crisis
Boom
Diff
Market Cap.
Crisis
Boom
Diff
Amihud Illiquidity Crisis
Boom
Diff
Bid/Ask Spread Crisis
Boom
Diff
Cons.
-0.01
0.11
-0.12
8,162
8,054
108
0.08
0.06
0.02
0.01
0.01
-0.00
Diff.:
Cons.Uncons. Uncons.
0.08 -0.09
0.39 -0.28
-0.31
17,448 -9,286
13,796 -5,742
3,652
0.05
0.03
0.05
0.01
0.00
0.01
0.00
0.01
0.00
-0.00
Not Sold
Cons.
0.02
0.08
-0.06
9,079
8,445
643
0.06
0.08
-0.02
0.01
0.01
0.00
Difference:
Sold Diff.: Not
Sold Cons. – Sold Not Sold
Uncons. Unc. (Cons.) (Unc.)
0.09 -0.07 -0.03
-0.01
0.25 -0.17 0.03
0.14
-0.16
20,367 -11,288 -917 -2,919
14,466 -6,021 -391
-670
5,901
0.04
0.03
0.01
0.01
0.07
0.02 -0.03
-0.02
-0.03
0.01
0.01
0.00
0.00
0.01
0.00
0.00
0.00
-0.00
Figure 1: Stocks Sold and Not Sold
0.2
0.15
0.1
0.05
0
T+18
T+17
T+16
T+15
T+14
T+13
T+12
T+11
T+10
T+9
T+8
T+7
T+6
T+5
T+4
T+3
T+2
T+1
T3
T2
T1
T-1
T-2
T-3
T-4
T-5
T-6
T-7
T-8
T-9
T-10
T-11
-0.05
T-12
Cumulative Return in Excess of VW CRSP
Portfolio Rebalancing During the 2007-2008 Crisis Period
Event Date
Constrained Fund Stocks Sold
Unconstrained Fund Stocks Sold
Constrained Fund Stocks Not Sold
Unconstrained Fund Stocks Not Sold

Liquidity shocks do not appear to trigger financial
crises:
◦ Debt issuance does not fall in crises at commercial banks and Ibanks
 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!