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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
about days in late July to about days by mid-September, though the over-
whelming majority was issued for just to days.
Disruptions quickly spread to other parts of the money market. In a flight to qual-
ity, investors dumped their repo and commercial paper holdings and increased their
holdings in seemingly safer money market funds and Treasury bonds. Market partici-
pants, unsure of each other’s potential subprime exposures, scrambled to amass funds
for their own liquidity. Banks became less willing to lend to each other. A closely
watched indicator of interbank lending rates, called the one-month LIBOR-OIS
spread, increased, signifying that banks were concerned about the credit risk involved
in lending to each other. On August , it rose sharply, increasing three-to fourfold over
historical values, and by September , it climbed by another . In , it would
peak much higher.
The panic in the repo, commercial paper, and interbank markets was met by imme-
diate government action. On August , the day after BNP Paribas suspended redemp-
tions, the Fed announced that it would “provid[e] liquidity as necessary to facilitate the
orderly functioning of financial markets,” and the European Central Bank infused
billions of Euros into overnight lending markets. On August , the Fed cut the dis-
count rate by basis points—from . to .. This would be the first of many
such cuts aimed at increasing liquidity. The Fed also extended the term of discount-
window lending to days (from the usual overnight or very short-term period) to of-
fer banks a more stable source of funds. On the same day, the Fed’s FOMC released a
statement acknowledging the continued market deterioration and promising that it
was “prepared to act as needed to mitigate the adverse effects on the economy.”
SIVS: “AN OASIS OF CALM”
In August, the turmoil in asset-backed commercial paper markets hit the market for
structured investment vehicles, or SIVs, even though most of these programs had lit-
tle subprime mortgage exposure. SIVs had a stable history since their introduction in
. These investments had weathered a number of credit crises—even through
early summer of , as noted in a Moody’s report issued on July , , titled
“SIVs: An Oasis of Calm in the Sub-prime Maelstrom.”
Unlike typical asset-backed commercial paper programs, SIVs were funded pri-
marily through medium-term notes—bonds maturing in one to five years. SIVs held
significant amounts of highly liquid assets and marked those assets to market prices
daily or weekly, which allowed them to operate without explicit liquidity support
from their sponsors.
The SIV sector tripled in assets between and . On the eve of the crisis,
there were SIVs with almost billion in assets. About one-quarter of that
money was invested in mortgage-backed securities or in CDOs, but only was in-
vested in subprime mortgage–backed securities and CDOs holding mortgage-backed
securities.
Not surprisingly, the first SIVs to fail were concentrated in subprime mortgage–
