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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
In , only five mortgage companies borrowed a total of billion through as-
set-backed commercial paper; in , entities borrowed billion. For in-
stance, Countrywide launched the commercial paper programs Park Granada in
and Park Sienna in . By May , it was borrowing billion through
Park Granada and . billion through Park Sienna. These programs would house
subprime and other mortgages until they were sold.
Commercial banks used commercial paper, in part, for regulatory arbitrage.
When banks kept mortgages on their balance sheets, regulators required them to
hold in capital to protect against loss. When banks put mortgages into off-bal-
ance-sheet entities such as commercial paper programs, there was no capital charge
(in , a small charge was imposed). But to make the deals work for investors,
banks had to provide liquidity support to these programs, for which they earned a
fee. This liquidity support meant that the bank would purchase, at a previously set
price, any commercial paper that investors were unwilling to buy when it came up for
renewal. During the financial crisis these promises had to be kept, eventually putting
substantial pressure on banks’ balance sheets.
When the Financial Accounting Standards Board, the private group that estab-
lishes standards for financial reports, responded to the Enron scandal by making it
harder for companies to get off-balance-sheet treatment for these programs, the fa-
vorable capital rules were in jeopardy. The asset-backed commercial paper market
stalled. Banks protested that their programs differed from the practices at Enron and
should be excluded from the new standards. In , bank regulators responded by
proposing to let banks remove these assets from their balance sheets when calculat-
ing regulatory capital. The proposal would have also introduced for the first time a
capital charge amounting to at most . of the liquidity support banks provided to
the ABCP programs. However, after strong pushback—the American Securitization
Forum, an industry association, called that charge “arbitrary,” and State Street Bank
complained it was “too conservative” —regulators in announced a final rule
setting the charge at up to ., or half the amount of the first proposal. Growth in
this market resumed.
Regulatory changes—in this case, changes in the bankruptcy laws—also boosted
growth in the repo market by transforming the types of repo collateral. Prior to ,
repo lenders had clear and immediate rights to their collateral following the bor-
rower’s bankruptcy only if that collateral was Treasury or GSE securities. In the
Bankruptcy Abuse Prevention and Consumer Protection Act of , Congress ex-
panded that provision to include many other assets, including mortgage loans, mort-
gage-backed securities, collateralized debt obligations, and certain derivatives. The
result was a short-term repo market increasingly reliant on highly rated non-agency
mortgage-backed securities; but beginning in mid-, when banks and investors
became skittish about the mortgage market, they would prove to be an unstable
funding source (see figure .). Once the crisis hit, these “illiquid, hard-to-value se-
curities made up a greater share of the tri-party repo market than most people would
have wanted,” Darryll Hendricks, a UBS executive and chair of a New York Fed task
force examining the repo market after the crisis, told the Commission. 
