Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

The largest mechanism for funding mortgage holdings was asset-backed commercial paper (ABCP).46 The three biggest American issuers of ABCP were Bank of America, Citigroup and J.P. Morgan. The vehicles for managing this operation were so-called structured investment vehicles (SIV), legal entities provided with a minimum layer of capital by their “sponsors,” but otherwise separate from the balance sheets of their parent banks. Onto these SIVs the parent bank would offload a large portfolio of mortgage bonds, securitized car loans, credit card debt or student debt. The SIV would pay the parent bank for the securities with funds raised by issuing ABCP. These were three-month notes backed by the assets in the SIV and the good name of the parent bank. Though the SIV had no track record, it could issue the commercial paper at competitive rates because of the value of the securities it held and because it was assumed that it enjoyed the backing of the sponsoring bank. Remarkably, under the bank regulations prevailing until the early 2000s, assets parked off balance sheet in the SIV could be backed by a fraction of the capital that would be required if they were on balance sheet. Inflating the balance sheet was risky but it raised rates of return on capital. Further profits were to be made by trading on the spread between long-term returns and short-term funding costs. Typically, an ABCP vehicle would hold a portfolio of securities with maturities of three to five years and would f...