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A Post Financial Crisis Analysis of the Investment Banking Industry

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This paper examines the qualitative and quantitative effects of the 2008 financial crisis on the current landscape of the investment banking industry. We begin by reviewing what occurred during the financial crisis, including which banks took TARP money, which banks

This paper examines the qualitative and quantitative effects of the 2008 financial crisis on the current landscape of the investment banking industry. We begin by reviewing what occurred during the financial crisis, including which banks took TARP money, which banks became bank holding companies, and significant mergers and acquisitions. We then examine the new regulations that were created in reaction to the crisis, including the Dodd-Frank Act. In particular, we focus on the Volcker Rule, which is a section of the act that prohibits proprietary trading and other risky activities at banks. Then we shift into a quantitative analysis of the changes that banks made from the years 2005-2016. To do this, we chose four banks to be representative of the industry: Goldman Sachs, Morgan Stanley, J.P. Morgan, and Bank of America. We then analyze four metrics for each bank: revenue mix, value at risk, tangible common equity ratio, and debt to equity ratio. These provide methods for analyzing how banks have shifted their revenue centers to accommodate new regulations, as well as how these shifts have affected banks' risk levels and leverage. Our data show that all four banks that we observed shifted their revenue centers to flatter revenue areas, such as investment management, wealth management, and consumer banking operations. This was paired with fairly flat investment banking revenues across the board when controlling for overall market changes in the investment banking sector. Additionally, trading-focused banks significantly shifted their operations away from proprietary trading and higher risk activities. These changes resulted in lower value at risk measures for Goldman Sachs and Morgan Stanley with very minor increases for J.P. Morgan and Bank of America, although these two banks had low levels of absolute value at risk when compared to Goldman Sachs and Morgan Stanley. All banks' tangible common equity ratios increased and debt to equity ratios decreased, indicating a safer investment for shareholders and lower leverage. We conclude by offering a forecast of our expectations for the future, particularly in light of a Trump presidency. We expect less regulation going forward and the potential reversal of the Volcker Rule. We believe that these changes would result in more revenue coming from trading and riskier strategies, increasing value at risk, decreasing tangible common equity ratios, and increasing debt to equity ratios. While we do expect less regulation and higher risk, we do not expect these banks to reach pre-crisis levels due to the significant amount of regulations that would be particularly difficult for the Trump administration to reverse.

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2017-05

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Preferences for Group Risk and Inequality

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Economists, political philosophers, and others have often characterized social preferences regarding inequality by imagining a hypothetical choice of distributions behind "a veil of ignorance". Recent behavioral economics work has shown that subjects care about equality of outcomes, and are willing

Economists, political philosophers, and others have often characterized social preferences regarding inequality by imagining a hypothetical choice of distributions behind "a veil of ignorance". Recent behavioral economics work has shown that subjects care about equality of outcomes, and are willing to sacrifice, in experimental contexts, some amount of personal gain in order to achieve greater equality. We review some of this literature and then conduct an experiment of our own, comparing subjects' choices in two risky situations, one being a choice for a purely individualized lottery for themselves, and the other a choice among possible distributions to members of a randomly selected group. We find that choosing in the group situation makes subjects significantly more risk averse than when choosing an individual lottery. This supports the hypothesis that an additional preference for equality exists alongside ordinary risk aversion, and that in a hypothetical "veil of ignorance" scenario, such preferences may make subjects significantly more averse to unequal distributions of rewards than can be explained by risk aversion alone.

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2014-05

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Risk-reducing Infrastructure: How Much is too Much?

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This paper examines infrastructure spending in a model economy. Infrastructure is subdivided into two types: one that makes future production more efficient, and another that decreases the risk of devastation to the future economy. We call the first type base

This paper examines infrastructure spending in a model economy. Infrastructure is subdivided into two types: one that makes future production more efficient, and another that decreases the risk of devastation to the future economy. We call the first type base infrastructure, and the second type risk-reducing infrastructure. Our model assumes that a single representative individual makes all the decisions within a society and optimizes their own total utility over the present and future. We then calibrate an aggregate economic, two-period model to identify the optimal allocation of today’s output into consumption, base infrastructure, and risk-reducing infrastructure. This model finds that many governments can make substantive improvements to the happiness of their citizens by investing significantly more into risk-reducing infrastructure.

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2021-05

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Arizona Clean Elections: The Impact of Publicly Financed Campaigns on Representation in the Legislature

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Campaign finance regulation has drastically changed since the founding of the Republic. Originally, few laws regulated how much could be contributed to political campaigns and who could make contributions. One by one, Congress passed laws to limit the possibility of

Campaign finance regulation has drastically changed since the founding of the Republic. Originally, few laws regulated how much could be contributed to political campaigns and who could make contributions. One by one, Congress passed laws to limit the possibility of corruption, for example by banning the solicitation of federal workers and banning contributions from corporations. As the United States moved into the 20th Century, regulations became more robust with more accountability. The modern structure of campaign finance regulation was established in the 1970's with legislation like the Federal Election Campaign Act and with Supreme Court rulings like in Buckley v. Valeo. Since then, the Court has moved increasingly to strike down campaign finance laws they see as limiting to First Amendment free speech. However, Arizona is one of a handful of states that established a system of publicly financed campaigns at the state-wide and legislative level. Passed in 1998, Proposition 200 attempted to limit the influence of money politics. For my research I hypothesized that a public financing system like the Arizona Citizens Clean Elections Commission (CCEC) would lead to Democrats running with public funds more than Republicans, women running clean more than men, and rural candidates running clean more than urban ones, and that Democrats, women, and rural candidates would win in higher proportions than than if they ran a traditional campaign. After compiling data from the CCEC and the National Institute on Money in State Politics, I found that Democrats do run with public funds in statistically higher proportions than Republicans, but when they do they lose in higher proportions than Democrats who run traditionally. Female candidates only ran at a statistically higher proportion from 2002 to 2008, after which the difference was not statistically significant. For all year ranges women who ran with public money lost in higher proportions than women who ran traditionally. Similarly, rural candidates only ran at a statistically higher proportion from 2002 to 2008. However, they only lost at higher proportions from 2002 to 2008 instead of the whole range like with women and Democratic candidates.

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2016-12