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

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 975
After the financial crisis broke out in August 2007, conduits
suffered large losses on their holdings of structured-finance securities.
Many conduits were faced with imminent default because they could
not roll over their ABCP. Investors refused to buy new issues of
ABCP because of the presumed exposure of ABCP conduits to losses
from subprime mortgages. 86 In order to avoid damage to their
reputations, most LCFI sponsors went beyond their legal obligations
and either brought conduit assets back onto their balance sheets or
provided explicit credit enhancements that enabled conduits to remain
in business. 87
Thus, notwithstanding the widely shared assumption that LCFIs
were following an “originate to distribute” strategy, LCFIs did not
transfer many of the credit risks created by their securitization
programs. Instead, “they ‘warehoused’ nonprime mortgage-related
assets . . . [and] transferred similar assets to sponsored OBS
entities.” 88 One study estimated that LCFIs retained risk exposures to
about half of the outstanding AAA-rated ABS in mid-2008 through
their “warehoused” and OBS positions. 89 Hence, in many respects,
“LCFIs pursued an ‘originate to not really distribute’ strategy, which
prevented financial regulators and analysts from understanding the
true risks created by the LCFIs’ involvement with nonprime
mortgage-related assets.” 90
E. While Other Factors Contributed to the Financial Crisis, LCFIs
Were the Most Important Private-Sector Catalysts for the Crisis
Excessive risk-taking by LCFIs was not the only cause of the
current financial crisis. Several additional factors played an important
role. First, many analysts have criticized the FRB for maintaining an
excessively loose monetary policy during the second half of the 1990s
and again between 2001 and 2005. Critics charge that the FRB’s
monetary policy mistakes produced speculative asset booms that led
86 Acharya & Schnabl, supra note 70, at 89–92.
87 Id. at 91–94; see also Wilmarth, supra note 4, at 1033 (observing that the conduit
rescues “showed that LCFIs felt obliged, for reasons of ‘reputation risk,’ to support OBS
entities that they had sponsored, even when they did not have explicit contractual
commitments to do so”). Citigroup absorbed $84 billion of assets onto its balance sheet
from seven SIVs, while HSBC and Société Générale together took back $50 billion of
assets from their SIVs. Id. at 1033 n.358.
88 Wilmarth, supra note 4, at 1033.
89 Acharya & Schnabl, supra note 70, at 97 tbl.2.2, 97–98.
90 Wilmarth, supra note 4, at 1034.