Page 305 - untitled

 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

The Fed also started plans for a new program that would use its emergency au-
thority, the Term Securities Lending Facility, though it wasn’t launched until March.
“The TLSF was more a view that the liquidity that we were providing to the banks
through the TAF was not leading to a significant diminishment of financing pres-
sures elsewhere,” Dudley told the FCIC. “So maybe we should think about bypassing
the banking system and [try] to come up with a vehicle to provide liquidity support
to the primary dealer community more directly.” 
On March , the Fed increased the total available in each of the biweekly TAF auc-
tions from  billion to  billion, and guaranteed at least that amount for six
months. The Fed also liberalized its standard for collateral. Primary dealers—mainly
the investment banks and the broker-dealer affiliates of large commercial banks—
could post debt of government-sponsored enterprises, including GSE mortgage–
backed securities, as collateral. The Fed expected to have  billion in such loans
outstanding at any given time.
Also at this time, the U.S. central bank began contemplating a step that was revo-
lutionary: a program that would allow investment banks—institutions over which
the Fed had no supervisory or regulatory responsibility—to borrow from the dis-
count window on terms similar to those available to commercial banks.

MONOLINE INSURERS: “WE NEVER EXPECTED LOSSES”

Meanwhile, the rating agencies continued to downgrade mortgage-backed securities
and CDOs through . By January , as a result of the stress in the mortgage
market, S&P had downgraded , tranches of residential mortgage–backed securi-
ties and , tranches from  CDOs. MBIA and Ambac, the two largest monoline
insurers, had taken on a combined  billion of guarantees on mortgage securities
and other structured products. Downgrades on the products that they insured
brought the financial strength of these companies into question. After conducting
stress analysis, S&P estimated in February  that Ambac would need up to 
million in capital to cover potential losses on structured products.  Such charges
would affect the monolines’ own credit ratings, which in turn could lead to more
downgrades of the products they had guaranteed.
Like many of the monolines, ACA, the smallest of them, kept razor-thin capital—
less than  million—against its obligations that included  billion in credit de-
fault swaps on CDOs. In late , ACA reported a net loss of . billion, almost
entirely due to credit default swaps.
This was news. The notion of “zero-loss tolerance” was central to the viability of
the monoline business model, and they and various stakeholders—the rating agen-
cies, investors, and monoline creditors—had traditionally assumed that the mono-
lines never would have to take a loss. As Alan Roseman, CEO of ACA, told FCIC
staff: “We never expected losses. . . . We were providing hedges on market volatility to
institutional counterparties. . . . We were positioned, we believed, to take the volatil-
ity because we didn’t have to post collateral against the changes in market value to
our counterparty, number one. Number two, we were told by the rating agencies that