Walden University ScholarWorks Walden Dissertations and Doctoral Studies Walden Dissertations and Doctoral Studies Collection 1-1-2011 Credit Default Swaps Regulation and the Use of Collateralized Mortgage Obligations in U.S. Financial Institutions Jon Patraic Neill Walden University Follow this and additional works at: https://scholarworks.waldenu.edu/dissertations Part of the Finance and Financial Management Commons, Public Administration Commons, and the Public Policy Commons This Dissertation is brought to you for free and open access by the Walden Dissertations and Doctoral Studies Collection at ScholarWorks. It has been accepted for inclusion in Walden Dissertations and Doctoral Studies by an authorized administrator of ScholarWorks. For more information, please contact [email protected]. Walden University College of Social and Behavioral Sciences This is to certify that the doctoral dissertation by Jon Patraic Neill has been found to be complete and satisfactory in all respects, and that any and all revisions required by the review committee have been made. Review Committee Dr. Stephen Morreale, Committee Chairperson, Public Policy and Administration Faculty Dr. Mark DeVirgilio, Committee Member, Public Policy and Administration Faculty Dr. Anne Fetter, University Reviewer, Public Policy and Administration Faculty Chief Academic Officer Eric Riedel, Ph.D. Walden University 2014 Abstract Credit Default Swaps Regulation and the Use of Collateralized Mortgage Obligations in U.S. Financial Institutions by Jon Patraic Neill MPA, Northern Kentucky University, 1996 BSBA, University of Florida, 1984 Dissertation Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy Public Policy and Administration Walden University July 2014 Abstract The fast and easy global movement of capital throughout the financial system, from lenders to borrowers and through intermediaries and financial market participants, has been recognized as a source of instability associated with illiquidity and financial crises. The purpose of this research was to better understand how regulation either enables or constrains capital movement. The theoretical framework comprised 2 contrasting public policymaking models, Arrow’s rational-comprehensive model and Kingdon’s garbage can model, which were used to derive opposing hypotheses. The research question addressed the nature of the relationship between Credit Default Swaps (CDSs) regulations and the flow of capital into Collateralized Mortgage Obligations (CMOs) when lenders share their borrower-related loan risks through intermediaries with other market participants. This quantitative study was a quasiexperimental time series design incorporating an autoregressive integrated moving average (ARIMA) model using secondary data published by the U.S. government. The 2 independent variables were regulatory periods involving 2 CDSs regulations and the dependent variable was capital in the U.S. financial system that is deployed to CMOs. The Commodity Futures Modernization Act of 2000’s ARIMA model (1,2,1) was significant at p < .05 and was negatively correlated to the Emergency Economic Stabilization Act of 2008’s ARIMA model (1,1,0), r = െ.91, n = 18, p < .001. These results suggest that regulations cannot be relaxed and then reinstated with predictable results. The potential for positive social change is from stable financial institutions that mutually benefit depositors and borrowers. Credit Default Swaps Regulation and the Use of Collateralized Mortgage Obligations in U.S. Financial Institutions by Jon Patraic Neill MPA, Northern Kentucky University, 1996 BSBA, University of Florida, 1984 Dissertation Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy Public Policy and Administration Walden University July 2014 UMI Number: 3622160 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. UMI 3622160 Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, MI 48106 - 1346 Dedication This dissertation is dedicated to the memory of my late cousin, Mrs. Frances G. Board Keightley-Moseley of Harrodsburg, Kentucky. Acknowledgments I wish to thank my dissertation committee, Dr. Stephen Morreale, for his encouragement and guidance, Dr. Mark DeVirgilio, for his thoughtful and insightful instruction, and Dr. Anne Fetter for her reviews that improved the study. Thank you as well to my Walden University professors and fellow students and to the academic and professional advisors from the research residencies whose wisdom continues to influence me. Most important of all, my wife Elizabeth and our sons, Alexander and Connor, supported this endeavor of mine in times of great difficulty and made it possible. Table of Contents List of Tables .......................................................................................................................v List of Figures .................................................................................................................... vi Chapter 1: Introduction to the Study ....................................................................................1 Introduction ....................................................................................................................1 Background ....................................................................................................................2 Problem Statement .........................................................................................................5 Purpose of the Study ......................................................................................................6 Research Question and Hypotheses ...............................................................................8 Theoretical Framework of the Study ...........................................................................11 The Rational-Comprehensive Policy Model ......................................................... 11 The Garbage Can Policy Model ............................................................................ 12 Nature of the Study ......................................................................................................15 Definitions....................................................................................................................16 Assumptions, Scope and Delimitations, and Limitations ............................................23 Assumptions .......................................................................................................... 23 Scope and Delimitations ....................................................................................... 24 Limitations ............................................................................................................ 25 Significance of the Study .............................................................................................26 Summary ......................................................................................................................27 Chapter 2: Literature Review .............................................................................................29 i Introduction ..................................................................................................................29 Search Method .............................................................................................................30 Theoretical Basis ..........................................................................................................31 Research Design...........................................................................................................34 Times Series Regression and ARIMA Analysis ................................................... 34 Variables and Date Ranges ................................................................................... 38 Current Research on the Financial Crisis.....................................................................39 Financial Instruments and the Global Financial Crisis Triggers .......................... 41 Capital Movement: Stability, Mobility, and Arbitrage ......................................... 47 Banking Regulatory Framework and Financial Stability ..................................... 49 Innovation in Financial Institutions and Capital Mobility .................................... 59 Mortgage Securitization Derivatives and Regulatory Arbitrage .......................... 65 Methodology and Analysis of Financial Institution Risk ..................................... 88 Conclusion ...................................................................................................................91 Chapter 3: Research Method ..............................................................................................93 Introduction ..................................................................................................................93 Research Question and Hypotheses .............................................................................93