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SUMMER 2007:
DISRUPTIONS IN FUNDING

CONTENTS

IKB of Germany: “Real money investors” ..........................................................
Countrywide: “That’s our /”.........................................................................
BNP Paribas: “The ringing of the bell”...............................................................
SIVs: “An oasis of calm”......................................................................................
Money funds and other investors: “Drink[ing] from a fire hose.........................

In the summer of , as the prices of some highly rated mortgage securities crashed
and Bear’s hedge funds imploded, broader repercussions from the declining housing
market were still not clear. “I don’t think [the subprime mess] poses any threat to the

overall economy,” Treasury Secretary Henry Paulson told Bloomberg on July . Mean-
while, nervous market participants were looking under every rock for any sign of hidden
or latent subprime exposure. In late July, they found it in the market for asset-backed
commercial paper (ABCP), a crucial, usually boring backwater of the financial sector.
This kind of financing allowed companies to raise money by borrowing against
high-quality, short-term assets. By mid-, hundreds of billions out of the .
trillion U.S. ABCP market were backed by mortgage-related assets, including some
with subprime exposure. 
As noted, the rating agencies had given all of these ABCP programs their top in-
vestment-grade ratings, often because of liquidity puts from commercial banks.
When the mortgage securities market dried up and money market mutual funds be-
came skittish about broad categories of ABCP, the banks would be required under
these liquidity puts to stand behind the paper and bring the assets onto their balance
sheets, transferring losses back into the commercial banking system. In some cases,
to protect relationships with investors, banks would support programs they had
sponsored even when they had made no prior commitment to do so.

IKB OF GERMANY: “REAL MONEY INVESTORS”

The first big casualty of the run on asset-backed commercial paper was a German
