Common (stock) sense about risk-shifting and bank bailouts

@article{Wilson2010CommonS,
  title={Common (stock) sense about risk-shifting and bank bailouts},
  author={Linus Wilson and Y. W. Wu},
  journal={Financial Markets and Portfolio Management},
  year={2010},
  volume={24},
  pages={3-29}
}
If a bank is facing insolvency, it will be tempted to reject good loans and accept bad loans so as to shift risk onto its creditors. We analyze the effectiveness of buying up toxic mortgages in troubled banks, buying preferred stock, and buying common stock. If bailing out banks deemed “too big to fail” involves buying assets at above fair market values, then these banks are encouraged ex ante to gamble on bad assets. Buying up common (preferred) stock is always the most (least) ex ante- and ex… Expand
67 Citations
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