CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
974 OREGON LAW REVIEW [Vol. 89, 951
LCFIs were unable to sell to arms-length investors. The sponsored
conduits sold asset-backed commercial paper (ABCP) to investors
and used the proceeds to buy structured-finance securities
underwritten by the sponsoring LCFIs. The conduits faced a
potentially dangerous funding mismatch between their longer-term,
structured-finance assets and their shorter-term, ABCP liabilities.
The sponsoring LCFIs covered that mismatch (in whole or in part) by
providing explicit credit enhancements (including lines of credit) or
implicit commitments to ensure the availability of liquidity if the
sponsored conduits could not roll over their ABCP. 80
U.S. regulators adopted risk-based capital rules that encouraged the
use of ABCP conduits. Those rules did not assess any capital charges
against LCFIs for transferring securitized assets to sponsored
conduits. Instead, the rules required LCFIs to post capital only if they
provided explicit credit enhancements to their conduits. 81 Moreover,
a 2004 regulation approved a very low capital charge for sponsors’
lines of credit, equal to only one-tenth of the usual capital charge of
8%, as long as the lines of credit had maturities of one year or less. 82
ABCP conduits sponsored by LCFIs grew rapidly during the peak
years of the credit boom. As a result, the ABCP market in the United
States nearly doubled after 2003 and reached $1.2 trillion in August
2007. Three-quarters of that amount was held in 300 conduits
sponsored by U.S. and European LCFIs. 83 Citigroup was the largest
conduit sponsor, and seven of the top ten sponsors were members of
the “big eighteen” club of LCFIs. 84 As a result of their risk exposures
to conduits and their other OBS commitments, many of the leading
LCFIs were much more highly leveraged than their balance sheets
indicated. 85
80 For discussions of the risk exposures of LCFIs to SIVs and other sponsored conduits,
see TETT, supra note 79, at 97–98, 127–28, 136, 196–98; Acharya & Schnabl, supra note
70, at 88–94; Wilmarth, supra note 4, at 1033.
81 Acharya & Schnabl, supra note 70, at 89.
82 Risk-Based Capital Guidelines, 69 Fed. Reg. 44,908, 44,910–11 (July 28, 2004); see
also Acharya & Schnabl, supra note 70, at 89 (noting that capital requirements for shortterm
“liquidity enhancements” were “only 0.8 percent of asset value”).
83 Marcin Kacperczyk & Philipp Schnabl, When Safe Proved Risky: Commercial Paper
During the Financial Crisis of 2007–2009, 24 J. ECON.PERSPECTIVES 29, 32–34, 38 fig.1
(2010).
84 Acharya & Schnabl, supra note 70, at 93 tbl.2.1 (listing Citigroup, Bank of America,
Chase, HSBC, Société Générale, Deutsche, and Barclays among the top ten conduit
sponsors); supra note 45 (listing the “big eighteen” LCFIs).
85 TETT, supra note 79, at 97–98; Crotty, supra note 33, at 570.