Friday, January 10th, 2014

Time	Event
5:00a	Better bankruptcies for banks Good accounting isn’t just a hallmark of a well-run company: As a new study of the banking industry by an MIT professor shows, transparent financials help ensure stability when banks fail, and can even reduce costs for consumers or taxpayers when the government must oversee the bankruptcies of financial firms. That has happened a lot lately, especially during the recent economic and financial crisis: From 2008 through 2010, the U.S. government was forced to act as the liquidating agent for more than 300 banks. But as MIT accounting professor Joao Granja shows in a newly published paper, the banks with better disclosure practices received higher bids for their assets, and regulators were able to conduct those liquidations more cheaply.   Overall, Granja finds, failing banks that had filed documents with the Securities and Exchange Commission (SEC) saw a 7.8 percentage point increase in the portion of their assets bought by other firms during bankruptcy auctions, since potential buyers were better able to understand and trust the value of the assets. “More transparency reduces information asymmetry, making bidders more willing and more confident about bidding for these assets,” says Granja, an assistant professor of accounting at the MIT Sloan School of Management. Meanwhile, banks that regularly filed SEC documents were 4.5 percentage points less expensive for regulators to handle in bankruptcy than banks that had not filed such documents. When institutions are more transparent and better scrutinized by market participants, outside parties do not have to spend as much time digging around in an effort to reveal the true state of a financial institution’s books. “There is a social benefit here,” Granja adds. “It’s less costly for the regulators to close it, [costs that] ultimately might actually fall on the taxpayer.” Helping buyers and depositors The paper, titled “The Relation between Bank Resolutions and Information Environment,” appears in the latest issue of the Journal of Accounting Research, a peer-reviewed publication in the field. Bank bankruptcies are administered by the Federal Deposit Insurance Corporation (FDIC), which is mandated by Congress with finding the least costly means of administering bankruptcy proceedings. Consumers, such as bank depositors, also have a strong interest in seeing bank failings run in a quick, orderly manner. When a bank fails, “They [the FDIC] immediately want to close it and sell it to a healthy bank, so that there’s no unrest for the depositors,” Granja notes. But not all bankruptcies are alike. Banks are regulated by a variety of agencies, but those registered with the SEC, Granja contends in the paper, undertake “a sizeable increase in financial transparency,” since they have to produce regular discussion and analysis of their activities in annual reports, and must file forms with every unscheduled but materially important event. In conducting his study, Granja scrutinized the bankruptcy auctions for 322 banks that failed between Jan. 1, 2008, and Dec. 31, 2010. Sales of assets for troubled banks often happen in the last two weeks before a bank is set to close, and potential buyers have a relatively short timeframe, just a few days, to conduct due diligence. That means consistent past financial disclosure is all the more significant. For this reason, as Granja found, an average 80 percent of the assets of banks not registered with the SEC sold at FDIC auctions, but 86 percent of assets sold among banks that had regularly filed SEC documents. “When the failed bank was more transparent, bidders are willing to take on a higher percentage of the assets of the failed bank,” Granja says. Scholars in the field believe Granja’s research is novel and valuable. Christian Leuz, an economist at the University of Chicago’s Booth School of Business who has read the paper, heralds its “clever research design,” and says it “provides convincing evidence on a benefit of disclosure regulation for banks that previously had not been noted: Greater transparency … makes bank resolution in the case of failure … less costly. This is a very interesting and important finding. It highlights that transparency has tangible benefits for the financial system.” Best practices for the next crisis U.S. economic history reveals a series of waves of failing banks, a phenomenon that was pronounced in the 1980s, for instance, as well as the 2008 to 2010 period. Granja believes that studying best practices for bankruptcy proceedings can help smooth the financial waters in case another such wave roils the banking industry. And while the FDIC’s funding comes, in part, from fees banks pay, higher costs for the agency could be passed on to consumers, or in some circumstances could even require taxpayer assistance. Greater transparency by banks now could thus help insulate citizens from future costs. “There might be [cause] for policy action to correct this, and for the regulators to require more transparency and disclosure on the part of the banks,” Granja concludes. (Comment on this)
5:24p	Gruber outlines key upcoming moments in Affordable Care Act rollout The closely watched rollout of the Affordable Care Act, which provides health insurance for all U.S. citizens, will face at least three key mileposts in 2014, MIT economist Jonathan Gruber said in a public talk on campus Thursday afternoon. Gruber, a health-care expert who worked with the Obama administration in developing the program, pointed to the March 31 enrollment deadline, when he expects large numbers of Americans to sign up for health insurance plans, as one good moment for evaluating the success of the act. In Massachusetts, where a similar state-run plan has existed for several years, Gruber noted, a huge portion of enrollees registered for individual insurance on the state-run exchange, a portal to the plans in the market, just before the deadline arrived.    “If you look at the experience in Massachusetts, right before the deadline is when everyone signs up,” said Gruber, a professor of economics at MIT. “So we’ll see a lot of people [nationally] signing up right before March 31 … and I think we’re going to get probably on the order of 5 [million] to 7 million people in these exchanges.” About 2 million people so far, Gruber noted, have signed up through exchanges or through Medicaid. Additionally, Gruber said, the period around the end of May and beginning of June, when private insurers set their rates for the coming year, will be a telltale indicator of the plan’s impact on the pocketbooks of Americans. “If insurers come and say, “We’re going to raise rates 5, 7, 8 percent, then that’s a huge victory,” Gruber asserted. “That’s … a typical annual growth in insurance premiums, it says it’s basically a stable market.” There is no legal limit on the extent to which insurers can raise rates, but increases of 10 percent or more are subject to review by government regulators. Finally, he added, by late fall 2014, surveys should produce copious empirical data on the plan’s rollout, helping policymakers understand how many previously uninsured people are signing up and how many are switching from employer-based programs to individual plans, among other questions. “That’s going to be the next big date to keep an eye on,” Gruber said. Bipartisan advocate The Affordable Care Act mandates all uninsured Americans to acquire health insurance in the private markets, while providing subsidies and tax credits; it also expands Medicaid, the program to help poor citizens afford health care. The implementation of the act has made near-constant headlines in recent months, largely because of glitches with healthcare.gov, the government website through which many Americans attempted to sign up for care starting on Oct. 1. Gruber called those problems “an IT fiasco,” but added that “it doesn’t look like it’s necessarily a long-term crisis for these exchanges” — although he acknowledged that many Americans have faced delays of six weeks or more in the enrollment process.   Gruber’s talk, titled “Obamacare: Past, Present, and Future,” was open to the public and delivered to an audience of about 120 people in MIT’s Building 6. It was sponsored by the Department of Economics as part of its programming during MIT’s Independent Activities Period, which runs between semesters. Gruber, a longtime specialist in health-care research, worked with then-Massachusetts Gov. Mitt Romney on the development of the state’s novel health-care program, and then consulted for the Obama administration about the similar federal plan; few other people have worked so closely with leaders in both major political parties on the issue. “I am totally biased, I am about the least objective observer of this law you could find in the world,” Gruber quipped about his advocacy of the Massachusetts program. “Nonetheless, if you look at the facts, I think it’s been, by the objective facts, a success.” He noted that about two-thirds of formerly uninsured residents are now covered, while premiums for individual insurance have dropped by about 50 percent. About two-thirds of Massachusetts residents support the system, according to polls. Still on the table: Medicaid adoption — or rejection Gruber also emphasized that states’ adoption of Medicaid expansion is an important facet of the plan to monitor. The Affordable Care Act offers full federal funding of Medicaid (an expense that is normally split 50-50 between the federal government and the states) for three years, an amount that declines to about 90 percent thereafter. Yet governors in 26 states have declined to accept the funding, a stance made possible by a 2012 Supreme Court ruling — and one Gruber labeled as “political malpractice.” “There is no citizen in a state like Florida that is worse off if they expand Medicaid,” Gruber suggested. “None. All of the [uninsured] get health insurance. Everyone else gets enormous federal stimulus injected into their economy.” He added: “That’s another thing to keep an eye on: How long are states going to hold out?” Gruber also discussed what he sees as a vital part of health care in general: controlling future costs. The Affordable Care Act attempts to do this through a variety of measures, some of which attempt to evaluate the efficacy of care.   “Cost control is a ton harder than [expanding] coverage,” Gruber observed. Overall health-care spending has increased from around 4 percent of the nation’s GDP in 1950 to about 17 percent today. Gruber said the improved quality of health care in that time has probably made that increased spending a sound investment, but suggested that a similarly large increase over the next half-century would probably not be subsidized by U.S. taxpayers. Still, Gruber argued, the value of the legislation can be seen in moral and practical terms, by limiting the catastrophic financial problems uninsured Americans have faced when dealing with serious illness: “We joined the league of industrialized nations who guarantee our citizens cannot be bankrupted by medical costs,” he said. (Comment on this)

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