David Musto - Faculty Research in Knowledge@Wharton

Victimizing the Borrowers: Predatory Lending's Role in the Subprime Mortgage Crisis

Wed, 20 Feb 2008 15:18:03 EST

As fallout from the subprime lending crisis continues, a number of remedies have been proposed to deal with it. One is legislation to curtail predatory lending, which is generally thought to be a factor behind the issuing of so many subprime loans to borrowers with poor credit. What qualifies as predatory lending? And what are the conditions that make it flourish? Wharton finance professors David Musto, Philip Bond and Bilge Yilmaz analyze predatory lending in a new paper titled, "Predatory Lending in a Rational World."

What's in Your Future(s)? The Merger of the Chicago Exchanges

Wed, 01 Nov 2006 16:20:23 EST

In mid-October, the Chicago Board of Trade agreed to be purchased by the Chicago Mercantile Exchange for about $8 billion, topping a wave of exchange mergers in the U.S. and Europe. Two factors drove the deal: the enormous growth in the use of futures, options and other derivatives to hedge risks and speculate, and the need for economies of scale to compete with exchanges that have grown through mergers. Wharton professors analyze the deal.

Bad News Is Good News: 'Distressed for Control' Investing

Wed, 26 Apr 2006 21:21:54 EST

Looking to make a profit from companies that have failed to do so and are on the brink of bankruptcy, 'distressed for control' investors restructure businesses by bringing in new managers, installing a new strategy, and renegotiating labor and supplier contracts. While 2005 was a record year for these transactions, Wharton faculty and private equity practioners say more 'bad' news is on the horizon -- "a second wave of bankruptcies" leading to what one expert calls "an extraordinary market" for 'distressed for control' investors.

The Next Chapter in Bankruptcy Law: What Does It Mean for Debtors and Creditors?

Mon, 21 Nov 2005 14:55:09 EST

After years of lobbying, credit card issuers and other business groups got their wish last spring: a bankruptcy law change making it harder for individuals to walk away from their debts. It was a tough fight, with many Democrats and other opponents claiming the law was nothing other than the powerful picking on the poor. Now, with the law to take effect Oct. 17, Wharton faculty and other experts wonder whether it will make much difference to debtors and creditors after all. And although it also modified some corporate bankruptcy rules, those changes seem relatively modest as well. Ultimately, it will take many months, and perhaps years, to evaluate the results.

The Economic Outlook for 2005

Wed, 12 Jan 2005 15:15:21 EST

Investors, consumers and businesses have had a fair share of concerns in 2004: high fuel prices, less-than-stellar job growth and volatile swings in the stock market, which remains well below the highs set four years ago. But by many measures the year is ending well. Oil prices dropped in December, hiring has picked up, and the Standard & Poor's 500 returned nearly 8% from the start of the year through mid-December. Will the good news continue in 2005? The smart money says the coming year will probably bring decent, but not terrific, gains in economic growth and stock prices, according to four Wharton professors, who nevertheless warn of possible fallout from the deepening federal and current-accounts deficits and the falling dollar.

Can We Trust the Mutual Fund Industry Yet, or Is Reform Illusory?

Wed, 28 Jul 2004 12:53:59 EST

Nine months after the first revelations of trading abuses in mutual funds, the Securities and Exchange Commission in June tackled the cozy relationships that, according to critics, have long prevented fund directors from properly overseeing fund managers. And, in recent months, several fund family executives have been forced to step down, companies have paid more than $2 billion in fines and a string of fund managers has faced civil and criminal charges. Are the enforcement actions and new rules enough to stop late trading, market timing and other abuses? Will governance reforms drive down the fees paid by investors?

It's Time to Curb Abuses in Mutual Funds

Wed, 19 Nov 2003 15:50:39 EST

The $7 trillion mutual fund industry is in the biggest crisis of its history for abuses such as late trading, market timing and self-dealing by fund executives. A string of brokerages and fund families are under investigation by the Securities and Exchange Commission, the NASD and state regulators in New York and Massachusetts. A number of top fund officials have been fired or compelled to step down. Congress has begun hearings. How deep do the abuses go and what remedies are in store for the industry?

Mutual Fund Scandals: Once Again, Individual Investors Are the Losers

Wed, 24 Sep 2003 00:00:00 EST

Recent revelations about late trading and market timing in mutual funds at Bank of America and other fund complexes come on the heels of earlier incidents involving sales incentives for brokers to push in-house funds and some companies� failure to credit investors with volume discounts on fees. Is the mutual fund industry going to become mired in the kind of scandal that has afflicted so many public companies over the past few years?

Ducking Foreign Taxes: How Much Can U.S. Investors Really Save?

Wed, 02 Jul 2003 00:00:00 EST

Individual investors are often advised to keep 10-20% of their portfolios in foreign stocks, and these days that�s easy to do with a slew of mutual funds. But there�s a problem most investors don�t notice: Many countries require stock issuers to withhold taxes on dividends paid to Americans and other foreign shareholders. This can have important consequences for non-taxable accounts, particularly retirement savings. Wharton finance professors David Musto and Christopher Geczy, along with two other colleagues, examine the situation in a new paper titled, �The Limits to Dividend Arbitrage: Implications for Cross-Border Investment.�

You Could Have Shorted Dot-coms: You Just Didn�t

Wed, 18 Dec 2002 00:00:00 EST

When the next round of finance texts is written, the American Dot-com Bubble of the late 1990s is sure to take its place with the classics � the Tulip Bubble, the South Seas Bubble, the run-up to the great crash of 1929. But what caused it? According to one theory, the problem was a shortage of short selling, say Wharton finance professors Christopher C. Geczy and David Musto. The two researchers and a third colleague have written an article examining this thesis entitled, �Stocks are Special Too: An Analysis of the Equity Lending Market.�

Equity Loans: How to Sell What You Do Not Own

Wed, 01 Aug 2001 00:00:00 EST

The market for lending equities is obscure and privately negotiated, but the benefits are substantial, according to Wharton finance professors Christopher Geczy and David Musto and Wharton doctoral student Adam Reed. In the article below, reprinted from the Financial Times� Mastering Investment series, the three authors discuss short-selling in equity lending, short selling of IPO stocks and the legal issues of shorting.

When Fund Managers Leave Their Fund, Should Investors Follow?

Mon, 16 Oct 2000 07:58:18 EST

When a mutual fund loses its star manager, is it time for investors to panic, jump ship, sell, sit back and relax, move to index funds, or some combination of the above? In fact there are no hard and fast rules about what to do, or what will happen, in the aftermath of a manager�s departure. But fund trackers and academics alike suggest a number of questions that investors can ask themselves before making the sell-or-hold decision.

Investors Beware: Some Mutual Fund Managers Inflate Year-end Returns

Thu, 20 Jan 2000 16:54:16 EST

In their analysis of stock mutual funds between 1985 and 1997, Wharton professor David K. Musto and three colleagues found that these funds tended to outperform the S&P 500 on the last trading day of the year and the quarter, but on the very next trading day the funds under-performed the S&P. The researchers see more than random occurrence at work. Instead, they say, these fund managers are engineering higher closings to increase one period�s return at the expense of the next. It�s known formally as �marking the close� and it�s illegal.