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

and bonds issued by other U.S. government agencies,” as an investigation by the state

legislature noted. But by November , because of ratings downgrades, the fund
held at least . billion in securities that no longer met the state’s requirements. It
had more than  billion in SIVs and other distressed securities, of which about 
million had already defaulted. And it held  million in Countrywide certificates

of deposit with maturities that stretched out as far as June . In early November,
following a series of news reports, the fund suffered a run. Local governments with-
drew  billion in just two weeks. Orange and Pinellas counties pulled out their en-
tire investments. On November , the fund’s managers stopped all withdrawals.
Florida’s was the hardest hit, but other state investment pools also took significant
losses on SIVs and other mortgage-related holdings.

COMMISSION CONCLUSIONS ON CHAPTER 13

The Commission concludes that the shadow banking system was permitted to
grow to rival the commercial banking system with inadequate supervision and
regulation. That system was very fragile due to high leverage, short-term funding,
risky assets, inadequate liquidity, and the lack of a federal backstop. When the
mortgage market collapsed and financial firms began to abandon the commercial
paper and repo lending markets, some institutions depending on them for fund-
ing their operations failed or, later in the crisis, had to be rescued. These markets
and other interconnections created contagion, as the crisis spread even to mar-
kets and firms that had little or no direct exposure to the mortgage market.
In addition, regulation and supervision of traditional banking had been weak-
ened significantly, allowing commercial banks and thrifts to operate with fewer
constraints and to engage in a wider range of financial activities, including activi-
ties in the shadow banking system.
The financial sector, which grew enormously in the years leading up to the fi-
nancial crisis, wielded great political power to weaken institutional supervision
and market regulation of both the shadow banking system and the traditional
banking system. This deregulation made the financial system especially vulnera-
ble to the financial crisis and exacerbated its effects.