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Wall Street and the Housing Bubble

  • Ing-Haw Cheng
  • Sahil Raina
  • Wei Xiong

We analyze whether mid-level managers in securitized finance were aware of the housing bubble and a looming crisis in 2004-2006 using their personal home transaction data. To the extent that the practice of securitization may have led to lax screening of subprime borrowers, we find that the average person in our sample did not expect it to lead to problems in the wider housing market. Certain groups of securitization agents were particularly aggressive in increasing their exposure to housing during this period, suggesting the need to expand the incentives-based view of the crisis to incorporate a role for beliefs.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18904.

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Date of creation: Mar 2013
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Publication status: published as Ing-Haw Cheng & Sahil Raina & Wei Xiong, 2014. "Wall Street and the Housing Bubble," American Economic Review, American Economic Association, vol. 104(9), pages 2797-2829, September.
Handle: RePEc:nbr:nberwo:18904
Note: AP CF ME
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  1. Fahlenbach, Rudiger & Stulz, Rene M., 2009. "Bank CEO Incentives and the Credit Crisis," Working Paper Series 2009-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Robert J. Shiller, 2008. "Derivatives Markets for Home Prices," NBER Working Papers 13962, National Bureau of Economic Research, Inc.
  3. Patrick Bolton & Hamid Mehran & Joel Shapiro, 2010. "Executive compensation and risk taking," Staff Reports 456, Federal Reserve Bank of New York.
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  6. Ing-Haw Cheng & Harrison Hong & Jose Scheinkman, 2010. "Yesterday's Heroes: Compensation and Creative Risk-Taking," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
  7. Margaret Hwang Smith & Gary Smith, 2006. "Bubble, Bubble, Where's the Housing Bubble?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(1), pages 1-68.
  8. Yuliya Demyanyk & Otto Van Hemert, 2009. "Understanding the subprime mortgage crisis," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
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  10. Cole, Shawn & Kanz, Martin & Klapper, Leora, 2012. "Incentivizing calculated risk-taking :evidence from an experiment with commercial bank loan officers," Policy Research Working Paper Series 6146, The World Bank.
  11. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2012. "Understanding booms and busts in housing markets," CQER Working Paper 2012-02, Federal Reserve Bank of Atlanta.
  12. Sumit Agarwal & Itzhak Ben-David, 2014. "Do Loan Officers' Incentives Lead to Lax Lending Standards?," NBER Working Papers 19945, National Bureau of Economic Research, Inc.
  13. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3139-3186.
  14. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1449-1496, November.
  15. Berndt, Antje & Gupta, Anurag, 2009. "Moral hazard and adverse selection in the originate-to-distribute model of bank credit," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 725-743, July.
  16. Rui Yao, 2005. "Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 197-239.
  17. Raghuram G. Rajan, 2006. "Has Finance Made the World Riskier?," European Financial Management, European Financial Management Association, vol. 12(4), pages 499-533.
  18. Amiyatosh Purnanandam, 2011. "Originate-to-distribute Model and the Subprime Mortgage Crisis," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1881-1915.
  19. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
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