About
- James R. and Helen D. Russell Professor of Finance
- Assistant Secretary for Economic Policy at the US Treasury (2011- 2013)
- Academic Advisory Panel, Federal Reserve Bank of Chicago and New York
Voting History
Question A: Allowing short selling of financial securities, such as stocks and government bonds, leads to prices that, on average, are closer to their fundamental values.
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Question B: When short sellers start to establish substantial short positions in a stock, the stock is likely to have been overvalued.
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Question C: Requiring investors to disclose short positions in a stock at the equivalent threshold as they are required to do for long positions would improve the informativeness of stock prices.
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With some measures of concentration by market capitalization within broad US stock market indices at an all-time high, investors seeking a well-diversified passive equity portfolio should consider alternatives to market-cap-weighted indices.
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Comment: For diversification, value weights capture the whole market, at least among market-traded assets.
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Tesla shareholders are likely to benefit substantially from the decision by the Delaware Court of Chancery to void Elon Musk's $56 billion remuneration package.
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On 10 January 2024, the SEC approved spot Bitcoin exchange-traded products:
https://www.sec.gov/news/statement/gensler-statement-spot-bitcoin-011023\
The SEC's approval of spot Bitcoin exchange-traded products makes investors overall measurably better off.
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The Biden Administration's recommendation to lower the real discount rate used in the cost and benefit analysis of federal regulations to 2 percent (from the current levels of 3 or 7 percent) will substantially improve regulatory analysis.
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Comment: A lower discount rate supports proposals with longer run benefits, but no risk adjustment lowers costs of riskier proposals. The full doc discusses many issues, eg simplicity, cash flows. Discount rate has a big impact on PV, but “Substantial” is a high bar.
-see background information here |
Question A: Harry Markowitz, the Nobel Prize-winning pioneer of modern portfolio theory, passed away earlier this year:
https://afajof.org/news/in-memoriam-harry-markowitz-past-president-of-the-american-finance-association-1927-2023/
Application of the principles of modern portfolio theory allows investors in practice to achieve substantial improvements in the risk-expected return trade-off relative to naive strategies such as equal-weighting that do not take account of return covariances.
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Question B: Widespread adoption of modern portfolio theory by investors has substantially improved the efficiency of capital allocation in financial markets.
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Question A: The Federal Reserve has begun quantitative tightening (QT) to reduce the size of its balance sheet. Fed holdings of Treasury securities have declined by $800 billion relative to the March 2020 peak. The Fed currently holds $4.9 trillion of Treasury securities, significantly larger than the $2.5 trillion holdings prior to the Covid pandemic.
A reduction in Fed holdings of Treasury securities measurably increases the interest rate on long-term U.S. Treasury bonds.
Vote | Confidence | Median Survey Vote | Median Survey Confidence |
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Comment: Evidence from QE suggests large asset purchases had the most impact when markets were disrupted (mortgages; QE1 compared to later). There is less evidence on QT, so this may be directionally correct, but causation/significance is not clear.
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Question B: A reduction in Fed holdings of Treasury securities measurably increases volatility in the Treasury market.
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Comment: Fed asset purchases reduced volatility during disruptions, such as March 2020, but there is less evidence on QT, or that it increased volatility. QT has been largely predictable, and other market dynamics (increased Treasury supply, rate policy) confound identifying QT effects.
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Question A: September 2023 was the 25th anniversary of the collapse of Long-Term Capital Management (LTCM). In response to LTCM's troubles, the Federal Reserve orchestrated a multi-billion dollar rescue package by a consortium of banks and it cut the Federal funds rate target by 75 basis points within six weeks.
The hedge fund sector's contribution to systemic risk is substantially lower today than at the time of LTCM.
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Question B: Financial market participants' expectation that the Fed will aggressively ease monetary policy in response to financial market dislocations is a substantial source of financial instability.
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Question A: SEC Announcement: https://www.sec.gov/news/press-release/2023-155
The benefits of the new SEC rules on private funds - which require private funds to provide transparency to their investors regarding the fees and expenses and other terms of their relationship with private fund advisers and the performance of such private funds - substantially exceed their costs.
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Question B: The new SEC rules will have a substantially negative impact on the industry by stifling capital formation and reducing competition.
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Question C: It is appropriate policy for the SEC to impose such rules on private funds even though the investors (limited partners) are sophisticated entities.
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Question A: New Money Market Fund (MMF) Rules: The SEC adopted amendments to the MMF rules, including a new mandatory liquidity fee for institutional prime and tax-exempt funds. The liquidity fee would trigger when daily net redemptions exceed five percent and when the costs associated with such redemptions are more than de minimus. https://www.sec.gov/news/press-release/2023-129
The new liquidity fee will substantially reduce the likelihood of runs on MMFs.
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Question B: The new liquidity fee will cause a substantial shift of assets under management from institutional prime and tax-exempt funds to government MMFs (which are exempt from the fees).
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Question A: The impact of the Covid-19 pandemic on working and shopping habits has not been fully priced into current private valuations of downtown commercial properties in major cities.
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Comment: Available private valuations show a markdown of CRE assets, especially among the worst performing in office and retail. Some assets still have stale prices or are held in opaque ways, so the repricing is not always available or visible.
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Question B: A continued fall in commercial real estate valuations would trigger another round of banking panic.
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Comment: Commercial real estate is a broad class. The concentration and pricing of the worst CRE assets across banks is opaque. There could be distress if the sector (and the economy) worsen, especially as margins tighten with higher funding costs and legacy low rate assets.
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Question A: Regulation that allows state pension funds to consider environmental, social, and governance factors in investment decisions only if these factors are material for risk and expected return would make retirees measurably worse off.
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Comment: For defined contribution plans, retirees make their own investment allocations and could be worse off by limiting their choice, unless other investments span these choices. If defined benefit, retirees are promised a payout, so the question applies to the payer choice instead.
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Question B: Regulation that prevents state pension funds from considering environmental, social, and governance factors in investment decisions even if these factors are material for risk and expected return would make retirees measurably worse off.
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Comment: Limiting access to assets relevant for risk and return, in addition to personal preference, constrains both utility and expected risk-adjusted payouts. A caveat is that realized returns do not equal expected returns, so whether retirees are actually worse off is still uncertain.
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Question A: Since maturity transformation is an inherent feature of commercial banks' business model, some duration mismatch between assets and liabilities is unavoidable.
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Question B: For the purposes of capital regulation, banks should be required to mark their holdings of Treasury and Agency securities to market at all times (even though their loans are not marked to market).
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Question A: Despite the empirical failures of the Capital Asset Pricing Model (CAPM) in explaining expected stock returns, a shareholder-value maximizing publicly-traded firm should still use the CAPM to calculate the cost of equity in capital budgeting.
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Question B: The equity risk premium that U.S. publicly traded firms should use in cost of equity calculations in April 2023 is above 6%.
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Question A: Financial regulators in the US and Europe lack the tools and authority to deter runs on banks by uninsured depositors.
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Question B: Not guaranteeing uninsured deposits at Silicon Valley Bank in full would have created substantial damage to the US economy.
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Question C: Fully guaranteeing uninsured deposits at Silicon Valley Bank substantially increases banks’ incentives to engage in excessive risk-taking.
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Question A: By issuing inflation-indexed bonds, and thereby providing a long-term real safe asset for pension funds and retirement savers, governments can make a substantial contribution to social welfare.
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Question B: Issuance of inflation-indexed bonds substantially helps government commit to a responsible fiscal and monetary policy.
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Question A: Large-scale stock buybacks by public corporations provide short-term rewards for shareholders and senior executives at the expense of potentially higher-return corporate investments.
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Question B: The proposed higher tax on corporate stock buybacks (an increase from 1% to 4%) would generate substantial public revenues.
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Question C: The proposed higher tax on corporate stock buybacks would generate a substantial increase in corporate investment.
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Question A: Missing payments on the US Treasury security obligations for several weeks would pose a substantial risk of a global financial crisis.
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Comment: A default on US government debt would disrupt the Treasury market, which underpins global markets with expected safety and liquidity. Costly recent disruptions were not as fundamental as this scenario. There is also potential longer run impact on US cost of funds and leadership.
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Question B: The requirement to periodically increase the debt ceiling measurably reduces the long-run size of the debt.
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Comment: Focus on fiscal issues is needed, but the debt ceiling is usually routinely raised and has not led to focused and lasting reductions in fiscal deficits. Moreover, concerns over political stalemate have the opposite effect, as with the volatility and downgrade in 2011.
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Question A: The SEC’s proposed new rule for stock orders from individual investors is likely to be effective in giving those investors better prices on their trades on average.
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Question B: The new rule would improve the overall operation of the stock market.
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Question A: Although the reported volatility of asset values in private markets (private equity, buyouts, and venture capital) is lower than that of comparable assets in public markets, their true volatility is broadly similar or greater.
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Comment: Private asset values are opaque and vary in leverage, liquidity, and risk to public markets, so the reported data are not comparable. Adjustments for these factors raise the estimated risk of private assets.
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Question B: Since the global financial crisis, the realized returns on private equities have measurably exceeded the returns on public equities.
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Comment: Reported returns to PE have been higher than public equity, though the gap has declined and the benchmark for comparable public equity is the subject of debate.
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Question A: The collapse of a major crypto intermediary will have little impact on the wider economy and the stability of the traditional financial system.
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Comment: There is little visibility into the activities and interconnectedness of crypto exchanges at this point. Traditional financial institutions with central positions can have a large impact relative to their size, and even there it can be difficult to see their risks.
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Question B: The collapse of a major crypto intermediary suggests the need for the crypto asset class to be more tightly regulated.
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Comment: I would say transparency rather than a specific form of regulation, at the start. Informed decisions require visibility into the firm, and additional information to support consumer protection and governance.
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The amount of passively invested funds has reached levels at which it has a measurable detrimental effect on market efficiency.
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Question A: Research on the nature and impact of bank runs has made it possible to limit substantially the wider economic damage from financial crises.
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Comment: Better understanding run dynamics helps to identify and implement better policies. But financial crises are broader than banks and bank runs, and regulatory arbitrage (among other limitations) limits their effectiveness in practice.
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Question B: Reforms of financial regulation since 2008 (and macroprudential policies in some countries) will not substantially reduce the probability of financial crises.
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Comment: There is large variation across countries in regulation and enforcement, plus dissimilar changes post-2008, so better to learn from heterogeneity than to draw broad conclusions. Moreover, the shocks going forward are not necessarily those that drove recent regulatory changes.
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Question A: The costs and risks associated with a sharp fall in the value of sterling outweigh any macroeconomic benefits for the UK of export stimulus due to a weaker currency.
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Comment: Two issues: i) the pound fell endogenously in response to announced fiscal changes, which also have an effect on markets; and ii) any export benefits occur on a longer time scale than the market reaction to fiscal and exchange rate effects.
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Question B: Concerns about government finances and debt sustainability can undermine the reserve currency status of a major currency.
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Comment: The stability and liquidity of a reserve currency rely on relative fiscal and monetary stability, as well as scale, for a global reserve currency.
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Question A: The typical chief executive officer of a publicly traded corporation in the U.S. is paid more than his or her marginal contribution to the firm's value.
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Question B: Mandating that U.S. publicly listed corporations must allow shareholders to cast a non-binding vote on executive compensation was a good idea.
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Question A: Having companies run to maximize shareholder value creates significant negative externalities for workers and communities.
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Comment: Could have more confidence if comparing to a real alternative or counterfactual.
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Question B: Appropriately managed corporations could create significantly greater value than they currently do for a range of stakeholders – including workers, suppliers, customers and community members – with negligible impacts on shareholder value.
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Comment: Appropriately managed seems unclear/aspirational if the goal is the create additional value. It would be interesting to know what changes.
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Question C: Effective mechanisms for boards of directors to ensure that CEOs act in ways that balance the interests of all stakeholders would be straightforward to introduce.
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Comment: Related to the previous question - how would board effectiveness change in practice?
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Question A: A mandate for public companies to provide climate-related disclosures (such as their greenhouse gas emissions and carbon footprint) would provide financially material information that enables investors to make better decisions.
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Comment: Firms have made climate-related statements and goals, a well-designed and consistent disclosure could be financially material to investors and performance evaluation.
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Question B: A mandate for public companies to provide climate-related disclosures would provide material information that enables investors to make better decisions with regards to non-financial objectives (such as aiding portfolio choice based on ESG principles).
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Comment: The relevance and consistency of the disclosure is important, and there is heterogeneity across industries and firms as to importance.
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Question C: A mandate for public companies to provide climate-related disclosures would induce them to reduce their climate impact substantially.
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Comment: A disclosure needs to be consistent and relevant to be meaningful. This also does not guarantee that a disclosure alone will induce a meaningful response from all firms. The investor and broader response is an added factor, also heterogeneous across industries and firms.
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