conversations.from: human
conversations.value: What could be a title for a book about Robert, Stuart's with the genre: Reference, Writing, Research & Publishing Guides?
conversations.from: assistant
conversations.value: A title for this book could be 'Across the Great Divide'
conversations.from: human
conversations.value: What is the first five paragraphs for this book?
conversations.from: assistant
conversations.value: Across the Great Divide
  One might feel that stock price crashes represent fire sales, irrational fads, or otherwise socially suboptimal phenomena. Stock market crashes can come with important shifts in investment and other economic outcomes. But stock market crashes are not runs and they are not crises. Investors bear risk for their returns directly and inescapably. My decision to sell—even if unwise, even if it provokes a price decline—does not pose an externality to you. If anything, the opposite is true: my fire sale is your buying opportunity.
  An exchange-traded fund (ETF) is a paradigmatic example of a run-proof intermediary. When asset values fall, the liability values of an exchange-traded fund fall automatically and the fund itself cannot go bankrupt.
  For this reason, the tech boom and bust of the late 1990s is a good comparison. The decline in tech stock value was similar to the decline in subprime mortgage-backed security value by September 2008. But there was no crisis and only a mild recession in the early 2000s. Why? Because tech losses were held in stock, and when stock falls you can't run. Housing losses were held in fragile, run-prone securities.
  Yes, the Great Depression was heralded by a stock market crash. But financial turmoil came from defaults by intermediaries who had borrowed to invest in stock and by the subsequent bank runs and bank failures. These are failures of debt, not of equity.
  Long-term debt occupies an intermediate spot. It does make fixed promises, but only at periodic intervals. On suspecting bad news, like equity, there is nothing you can do immediately to avoid losses. Long-term debt leads to crises when it isn't quite long enough, when it needs to be refinanced in large chunks. The Greek debt crisis came when Greece needed to refinance long-term debt, not when it could not borrow for one year's spending.
conversations.from: human
conversations.value: Delete the last sentence.
conversations.from: assistant
conversations.value: Across the Great Divide
  One might feel that stock price crashes represent fire sales, irrational fads, or otherwise socially suboptimal phenomena. Stock market crashes can come with important shifts in investment and other economic outcomes. But stock market crashes are not runs and they are not crises. Investors bear risk for their returns directly and inescapably. My decision to sell—even if unwise, even if it provokes a price decline—does not pose an externality to you. If anything, the opposite is true: my fire sale is your buying opportunity.
  An exchange-traded fund (ETF) is a paradigmatic example of a run-proof intermediary. When asset values fall, the liability values of an exchange-traded fund fall automatically and the fund itself cannot go bankrupt.
  For this reason, the tech boom and bust of the late 1990s is a good comparison. The decline in tech stock value was similar to the decline in subprime mortgage-backed security value by September 2008. But there was no crisis and only a mild recession in the early 2000s. Why? Because tech losses were held in stock, and when stock falls you can't run. Housing losses were held in fragile, run-prone securities.
  Yes, the Great Depression was heralded by a stock market crash. But financial turmoil came from defaults by intermediaries who had borrowed to invest in stock and by the subsequent bank runs and bank failures. These are failures of debt, not of equity.
  Long-term debt occupies an intermediate spot. It does make fixed promises, but only at periodic intervals. On suspecting bad news, like equity, there is nothing you can do immediately to avoid losses. Long-term debt leads to crises when it isn't quite long enough, when it needs to be refinanced in large chunks.
conversations.from: human
conversations.value: What is five more paragraphs?
conversations.from: assistant
conversations.value: Our base case assumes that a theoretical bank has tier 1 common equity of 8 percent of RWA and a debt shield of 12 percent of RWA, for total loss-absorbing capital of 20 percent of RWA. We assume that the bank's bonds default when regulators put the holding company into resolution, modeled in our base case as the point at which tier 1 common equity falls below 5.5 percent of RWA. We also examine a decline in tier 1 common equity below 4 percent of RWA as a less conservative point at which regulators might put the holding company into resolution. Because assets are sold over time in a SPOE resolution, the implied losses do not include any liquidation costs. We assume that a systemic financial crisis environment occurs every twenty years, given historical experience since 1900 that suggests systemic financial crises have occurred in the United States every few decades.
  To model the "normal" or non-crisis environment, our base case assumes a log-normal probability distribution with a mean of zero, asset volatility of 1 percent, and expected losses on bonds given default of 10 percent. To model the "systemic financial crisis" environment, our base case assumes a T-distribution with three degrees of freedom ("fat tails"), a mean of zero, and expected losses on bonds given default of 30 percent, which translates to maximum asset volatility of 10 percent.
  We also validate our results using CDS pricing. Because investors use CDS as protection on bond instruments, the CDS price represents the cost of insurance and thus the market's expectation of both the likelihood of default and the associated losses. And because the full price of CDS also reflects characteristics of the CDS instrument itself, such as liquidity, our assumption that the price of CDS reflects in its entirety the market's expected loss on the bonds is inherently conservative. We incorporate CDS information by confirming that expected maximum losses are no greater than 100 basis points (average CDS prices for the six largest US banks over the past three months). In our base case scenario, expected maximum losses do not breach 100 basis points and are thus validated.
  We model how frequently losses would be expected to deplete certain levels of loss-absorbing capital under these base-case assumptions, using the following thresholds:
  The results of our base-case analysis can be seen in figure 12.7, which also shows the results of sensitivity analyses for these base-case assumptions. These sensitivity analyses show that the results do not vary significantly when we modify the inputs. We sensitize our model to:
conversations.from: human
conversations.value: What is the last three paragraphs?
conversations.from: assistant
conversations.value: The Initiative on Business and Public Policy at Brookings provides analytical research and constructive recommendations on public policy issues affecting the business sector in the United States and around the world.
  Led by Senior Fellow and Bernard L. Schwartz Chair Martin N. Baily, the Initiative focuses on policy reforms that can enhance market performance and enable businesses, their customers, and their employees to prosper. It integrates research findings, policy analysis, and outreach efforts, and provides a platform for convening interested parties, and discussing and disseminating new insights and policy proposals.
  The Initiative's core strengths are in several areas, notably in financial reform, productivity and competitiveness. The Initiative on Business and Public Policy also provides a platform to address social issues that affect businesses, such as health care, education, immigration, and energy and the environment. The Initiative draws on scholars from Brookings, scholars in the broader academic and policy communities, and business leaders.