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SUMMER : DISRUPTIONS IN FUNDING 

bank, IKB Deutsche Industriebank AG. Since its foundation in , IKB had fo-
cused on lending to midsize German businesses, but in the past decade, management
diversified. In , IKB created an off-balance-sheet commercial paper program,
called Rhineland, to purchase a portfolio of structured finance securities backed by
credit card receivables, business loans, auto loans, and mortgages. It made money by
using less expensive short-term commercial paper to purchase higher-yielding long-
term securities, a strategy known as “securities arbitrage.” By the end of June,
Rhineland owned  billion (. billion) of assets,  of which were CDOs and
CLOs (collateralized loan obligations—that is, securitized leveraged loans). And at
least  billion (. billion) of that was protected by IKB through liquidity puts. 
Importantly, German regulators at the time did not require IKB to hold any capital to
offset potential Rhineland losses. 
As late as June , when so many were bailing out of the structured products
market, IKB was still planning to expand its off-balance-sheet holdings and was will-
ing to take long positions in mortgage-related derivatives such as synthetic CDOs. 
This attitude made IKB a favorite of the investment banks and hedge funds that were
desperate to take the short side of the deal.
In early , when Goldman was looking for buyers for Abacus -AC, the
synthetic CDO mentioned in part III, it looked to IKB. An employee of Paulson &
Co., the hedge fund that was taking the short side of the deal, bluntly said that “real
money” investors such as IKB were outgunned. “The market is not pricing the sub-
prime [residential mortgage–backed securities] wipeout scenario,” the Paulson em-
ployee wrote in an email. “In my opinion this situation is due to the fact that rating
agencies, CDO managers and underwriters have all the incentives to keep the game
going, while ‘real money’ investors have neither the analytical tools nor the institu-
tional framework to take action before the losses that one could anticipate based [on]
the ‘news’ available everywhere are actually realized.” IKB subsequently purchased

 million of the A and A tranches of the Abacus CDO and placed them in

Rhineland. It would lose  of that investment.
In mid-, Rhineland’s asset-backed commercial paper was held by a number
of American investors, including the Montana Board of Investments, the city of Oak-
land, California, and the Robbinsdale Area School District in suburban Minneapolis.
On July , IKB reassured its investors that ratings downgrades of mortgage-backed

securities would have only a limited impact on its business. However, within days,
Goldman Sachs, which regularly helped Rhineland raise money in the commercial
paper market, told IKB that it would not sell any more Rhineland paper to its clients.
On Friday, July , Deutsche Bank, recognizing that the ABCP markets would soon
abandon Rhineland and that IKB would have to provide substantial support to the
program, decided that doing business with IKB was too risky and cut off its credit
lines. These were necessary for IKB to continue running its business. Deutsche Bank
also alerted the German bank regulator to IKB’s critical state. With the regulator’s en-
couragement, IKB’s largest shareholder, KfW Bankengruppe, announced on July 
that it would bail out IKB. On August , Rhineland exercised its liquidity puts with