Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

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 fund those securities by selling commercial paper repayable between three months and as little as a few days. For the managers of cash pools, the commercial paper was more attractive than the underlying securities, because it was very short term and backed by a top-rated commercial bank. For the parent banks, the spread between the return from the high-risk cocktail of assets held in the SIV and the low rate paid on the highly rated ABCP was handsome.

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