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When Safe Proved Risky:




Journal of Economic PerspectivesVolume 24, Number 1Winter 2010Pages 2950;When Safe Proved Risky;Commercial Paper during the;Financial Crisis of 20072009;Marcin Kacperczyk and Philipp Schnabl;C;ommercial paper is a short-term debt instrument issued by large corporations. For issuers, commercial paper is a way of raising capital cheaply at;short-term interest rates. For investors, commercial paper offers returns;slightly higher than Treasury bills in exchange for taking on minimal credit risk.;At the beginning of 2007, commercial paper was the largest U.S. short-term debt;instrument with more than $1.97 trillion outstanding. Most of the commercial;paper was issued by the financial sector, which accounted for 92 percent of all commercial paper outstanding.;Commercial paper played a central role during the financial crisis of;20072009. Before the crisis, market participants regarded commercial paper as a;safe asset due to its short maturity and high credit rating. Two events changed this;perception. The first event began to unfold on July 31, 2007, when two Bear Stearns;hedge funds that had invested in subprime mortgages filed for bankruptcy. In the;following week, other investors also announced losses on subprime mortgages.;On August 7, 2007, BNP Paribas suspended withdrawals from its three investment;funds because of its inability to assess the value of the mortgages and other investment held by the funds. Given that similar assets served as collateral for a specific;category of commercial paperasset-backed commercial papermany investors;became reluctant to purchase asset-backed commercial paper. The total value of;asset-backed commercial paper outstanding fell by 37 percent, from $1.18 trillion;Marcin Kacperczyk and Philipp Schnabl are both Assistant Professors of Finance, Stern;School of Business, New York University, New York, New York. Kacperczyk is also a Faculty;Research Fellow, National Bureau of Economic Research, Cambridge, Massachusetts. Their;e-mail addresses are and;;;doi=10.1257/jep.24.1.29;30;Journal of Economic Perspectives;in August 2007 to $745 billion in August 2008. Other categories of commercial;paper remained stable during this period.;The second event occurred on September 16, 2008, when the Reserve Primary;Funda large money market fund with $65 billion of assets under management;announced that it had suffered significant losses on its $785 million holdings of;Lehman Brothers commercial paper. Instead of each of its shares being worth;$1a common rule in the money market industrythe Reserve Fund announced;its shares were worth only 97 cents. In other words, the fund broke the buckan;occurrence that had happened only once before in the history of money market;funds. This news triggered the modern-day equivalent of a bank run, leading;to about $172 billion worth of redemptions from the $3.45-trillion-worth money;market fund sector. The run stopped on September 19, 2008three days after;it startedwhen the U.S. government announced that it would provide deposit;insurance to investments in money market funds. Even though the announcement;halted the run on money market funds, most funds nonetheless reduced their holdings of all types of commercial paper because they deemed them too risky. Within;one month after the Reserve Funds announcement, the total value of commercial;paper outstanding fell by 15 percent, from $1.76 trillion to $1.43 trillion.;To stop the sudden decline in commercial paper, the Federal Reserve decidedfor the first time in its historyto purchase commercial paper directly. The;Federal Reserve started purchasing commercial paper on October 26, 2008, and its;action promptly stabilized the market. By early January 2009, the Federal Reserve;was the single largest purchaser of commercial paper and owned paper worth;$357 billion, or 22.4 percent of the market, through a variety of lending facilities.;Throughout the year 2009, the Federal Reserve steadily reduced its holdings and by;October 2009 it held $40 billion of commercial paper, accounting for 3.4 percent;of the market.;We will offer an analysis of the commercial paper market during the financial crisis. First, we describe the institutional background of the commercial paper;market. Second, we analyze the supply and demand sides of the market. Third, we;examine the most important developments during the crisis of 20072009. Last;we discuss three explanations of the decline in the commercial paper market;substitution to alternative sources of financing by commercial paper issuers, adverse;selection, and institutional constraints among money market funds.;Basics of Commercial Paper;In the United States, commercial paper has been an important source of;financing since the nineteenth century. According to the Securities Industry and;Financial Markets Association, in early 2007, total U.S. short-term debt financingalso referred to as money market financingaccounted for approximately;$5 trillion. Commercial paper was the largest instrument in this market with more;than $1.97 trillion outstanding. The second-largest instrument was U.S. Treasury;Marcin Kacperczyk and Philipp Schnabl;31;bills, which accounted for $940 billion outstanding. Other important short-term;debt instruments were time deposits, repurchase agreements, short-term notes;and bankers acceptances.1;Commercial paper is usually issued at a discount to a predetermined face;value, which means that investors acquire commercial paper at a price below the;face value and receive the face value at maturity. The difference between the;purchase price and the face value is the discountthat is, the interest received on;commercial paper. In practice, the interest rate on commercial paper is a bit higher;than the interest rate on Treasury bills of the same maturity and a bit lower than;the interest rate on loans of the same maturity such as LIBOR (London Interbank;Offered Rate), the benchmark interest rate paid on short-term lending among;large banks (Stigum and Crescenzi, 2007).;Almost all commercial paper is rated by one or more nationally accredited rating agencies like Moodys, Standard & Poors, or Fitch. Commercial paper sold in;the market typically has the highest short-term rating as many market participants;either by choice or by regulationrestrict their purchases to high-quality papers.;Commercial paper is issued either via a dealer or directly by a corporation that;needs to raise capital. In August 2006, about 80 percent of commercial paper was;issued by dealers and the remaining 20 percent by corporations. Dealers charge;fees of 5 to 12.5 basis points for issuing commercial paper, the fees vary according;to the issuers credit history, issuance size, and market conditions. Dealers typically;advise issuers on pricing and they purchase positions that do not sell in the market;(Stigum and Crescenzi, 2007).;Most investors in the commercial paper market purchase the paper at issuance and hold it until maturity. Hence, there is little trading of commercial paper;in secondary markets. Instead, many investors continuously roll over maturing;commercial paper, which means that they purchase newly issued commercial;paper from the same issuer once their holdings of commercial paper mature. As;a result, issuers usually refinance the repayment of maturing commercial paper;with newly issued commercial paper. However, the need to roll over maturing;commercial paper generates the risk that investors may not be willing to refi nance maturing commercial paper. This risk is often called roll-over or liquidity;risk. In this case, the issuer needs to find financing elsewhere to repay maturing;commercial paper.;1;The commercial paper market also exists in Europe, although the market is smaller. In January 2007;according to Eurocleara consortium of the main European securities depositoriestotal value of;commercial paper outstanding in that market amounted to $691 billion. In many ways, the commercial paper market in Europe is similar to that in the United States, the key difference is that offerings;are often denominated in currencies other than the U.S. dollar. Nevertheless, many large issuers are;active in both markets and issue simultaneously in Europe and in the United States. We will focus here;on the commercial paper market in the United States, though most of our analysis also applies to the;commercial paper market in Europe.;32;Journal of Economic Perspectives;Supply Side of Commercial Paper;From the perspective of a commercial paper issuer, one benefit of commercial;paper is that the issuer can avoid registration under the Securities Act of 1933, which;is the set of rules that requires any firm issuing securities to provide a description;of the companys properties and business, of the security itself, and of corporate;management, along with financial statements. Registration is generally considered;an expensive and lengthy process. The exemption from registration for commercial;paper is usually based on Section 3(a)(3) of the 1933 Securities Act, which requires;commercial paper issuers to satisfy three criteria. First, the maturity of commercial;paper must not be more than 270 days. In practice, commercial paper typically has;far shorter maturitiesbetween one and 90 dayswith an average maturity of about;30 days. Second, commercial paper must not be targeted towards the general public.;Hence, issuers of commercial paper cater to institutional investors, usually offering;large denominations of $100,000 or more. Third, issuers of commercial paper must;only use their proceeds from issuing commercial paper to finance current assets;such as receivables or inventory. In practice, this requirement implies that firms;need to demonstrate that they have sufficient scale of current transactions to justify;the size of their commercial paper programs (Hahn, Cook, and Laroche, 1993).;As an alternative to Section 3(a)(3), issuers can also claim an exemption from;registration under Section 4(2), which restricts the sale of commercial paper to accredited investors and, in exchange, allows issuers to use the proceeds to finance long-term;assets. Issuers can also claim exemption under Section 3(a)(2), which requires commercial paper to be fully supported by a bank guarantee (FitchRatings, 2001).;Depending on the issuer, there are three categories of commercial paper;asset-backed, financial, and corporate commercial paper. For historical reasons;the last two categories are sometimes simply referred to as commercial paper.;Corporate financial paper is also referred to as nonfinancial commercial paper.;To avoid confusion, we use the term commercial paper only when we refer to all;three categories at once.;Over the last two decades, the commercial paper market has grown substantially. This growth was mostly spurred by the development of asset-backed;commercial paper, which was first issued in the 1980s. The total value of the commercial paper market in 1990 was $558 billion, of which 5.7 percent was asset-backed;commercial paper, 59.9 percent was financial commercial paper, and 34.4 percent;was corporate commercial paper. In January 2007, the total value of commercial paper accounted for $1.97 trillion, of which 56.8 percent was asset-backed;commercial paper, 34.4 percent was financial commercial paper, and 5.7 percent;was corporate commercial paper.;Asset-backed Commercial Paper;Asset-backed commercial paper is issued by off-balance-sheet conduits of large;financial institutions, where off balance sheet means that the assets and liabilities;of the conduits are not included on the financial institutions balance sheets.;When Safe Proved Risky: Commercial Paper during the Financial Crisis of 20072009;33;However, the assets are under the control of the financial institution in the sense;that the conduit is a shell company that is managed by the financial institution.;Conduits typically hold diversified portfolios of financial assets. In the 1980s;and early 1990s, most conduits only invested in short-term and medium-term assets;such as trade receivables (dues for goods sold) of the sponsoring financial institutions clients. During the late 1990s, some conduits started investing in long-term;assets, including securitized assets such as mortgage-backed securities. By the early;2000s, most conduits invested in long-term assets, some of which were originated by;the financial institutions own clients and some of which were securitized assets originated by other financial institutions. As a result of this investment strategy, conduits;developed a maturity mismatch between the long maturity of their assets and the;short maturity of their asset-backed commercial paper. This maturity mismatch;exposed conduits to roll-over risk, the risk that investors would stop refinancing the;asset-backed commercial paper. The roll-over risk makes the conduit riskier for outside investors because the conduit may go bankrupt if all investors stop refinancing;at the same time and the conduit cannot sell off its assets to repay investors.;To protect outside investors against roll-over risk, the financial institution;that manages the conduit typically provides credit guarantees to outside investors.;Under these credit guarantees, the financial institution promises to pay off maturing asset-backed commercial paper in case the conduit is unable to do so. From an;investors perspective, the combination of credit guarantees and conduits assets;substantially reduces the default risk of asset-backed commercial paper (Moodys;Investors Service, 2003).;Using data from credit rating agencies, Acharya, Schnabl, and Suarez (2009);show that, in January 2007, 296 conduits were authorized to issue asset-backed;commercial paper in the United States and Europe. The conduits were supported;by a total of 126 sponsoring financial institutions. Most sponsoring financial institutions were large commercial banksbased in the United States and Europemany;of which sponsored more than one conduit. In total, commercial banks accounted;for $903 billionor 74.8 percentof asset-backed commercial paper outstanding.;For example, the largest financial institution sponsoring conduits in the United;States was Citigroup with 16 conduits and $92.6 billion of asset-backed commercial;paper outstanding. The largest financial institution sponsoring conduits in Europe;was the Dutch Bank ABN Amro with nine conduits and $68.6 billion of assetbacked commercial paper outstanding. Besides commercial banks, large sponsors;of conduits also included structured investment groups ($182 billion), mortgage;lenders ($72 billion), and other financial institutions ($79 billion).;About 74.1 percent of outstanding commercial paper was issued by conduits;with full credit guarantees. Acharya, Schnabl, and Suarez (2009) show that full;credit guarantees are structured to avoid capital requirements required for assets;held by banks directly. They argue that the avoidance of capital requirements was;an important driver behind the growth of asset-backed commercial paper. An;additional 18.4 percent of outstanding commercial paper was issued by conduits;with extendible notes guarantees. Extendible notes guarantees are similar to full;34;Journal of Economic Perspectives;credit guarantees except that conduits can extend the commercial papers maturity;for a limited period of time. The remaining 7.5 percent was issued by structured;investment vehicles, which are conduits that issue longer-term debt in addition to;asset-backed commercial paper. Credit guarantees of structured investment vehicles;typically cover asset-backed commercial paper, but not the longer-maturity debt.;Financial Commercial Paper;Financial commercial paper is issued by large financial institutions. In contrast to asset-backed commercial paper, financial commercial paper is issued by;the institution directly and not via a conduit. Also, financial commercial paper is;unsecured and the issuer does not pledge assets as collateral. Financial commercial;paper is considered a low-risk asset because of its short maturity and the fact that its;issuers are large institutions with strong balance sheets. If the balance sheet of an;issuer deteriorates, investors usually become reluctant to roll over maturing commercial paper and the issuer has to exit the commercial paper market.;The main issuers of financial paper are foreign financial institutions, accounting for $455 billion of commercial paper in early 2007. Many foreign issuers are;U.S. subsidiaries of foreign banks, which are set up primarily to access the U.S.;commercial paper market. The two main U.S. issuers of financial commercial;paper are captive finance companies and bank-related finance companies. Captive;finance companies are subsidiaries of automobile companies or manufacturing;companies that issue commercial paper to secure financing for their parent companies (Fabozzi and Mann, 2005). In January 2007, total liabilities of captive finance;companies accounted for $1.87 trillion, of which $165 billion was commercial;paper. Some of the largest captive finance companies issuing financial commercial;paper are those owned by General Motors, General Electric, and Toyota (Stigum;and Crescenzi, 2007, Standard and Poors, 2009).;Bank-related finance companies are funding subsidiaries of large bank holding companies. Many bank holding companies use such funding subsidiaries to;issue commercial paper and pass the proceeds downstream into the bank. Bank;holding companies choose such a structure because banks themselves are usually;not allowed to issue commercial paper. Some bank holding companies also issue;commercial paper to finance nonbank activities. In January 2007, total liabilities;of bank holding companies equaled $757 billion, of which $79 billion were in;the form of commercial paper. Some of the largest bank holding companies issuing financial paper are those of Citibank and American Express (Saunders and;Cornett, 2008, Standards and Poors, 2009).;Corporate Commercial Paper;Corporate commercial paper is issued by nonfinancial businesses. In January;2007, total credit market debt of nonfinancial businesses was $9.16 trillion of which;$145 billion was commercial paper, accounting for 1.6 percent of total liabilities.;Like financial commercial paper, corporate commercial paper is unsecured and;only large, creditworthy firms with strong balance sheets can issue commercial;Marcin Kacperczyk and Philipp Schnabl;35;paper. Most issuers are in the largest size quintile of publicly traded corporations.;For these firms, commercial paper is an important source of financing, representing about 30 percent of their current liabilities (Downing and Oliner, 2007).;Among the main issuers of corporate financial paper are General Electric and;Coca-Cola (Standard and Poors, 2009).;Historically, commercial paper issuers used the proceeds from issuance to cover;their short-term financing needs for working capital and inventory. Over time, many;issuers started rolling over maturing commercial paper at regular frequencies, thus;effectively financing a constant share of their activities via commercial paper. Kahl;Shivdasani, and Wang (2008) estimate that, on average, commercial paper borrowing represents 36 percent of investment outlays among commercial paper issuers.;Demand Side of Commercial Paper;Money market funds and mutual funds are the main investors in commercial;paper. In January 2007, money market funds and mutual funds owned commercial;paper worth $767 billion, or 31.4 percent of the market, according to the Federal;Reserve Flow of Funds data. Other important investor classes were foreign investors;($299 billion), state and local governments ($205 billion), funding corporations;($198 billion), and nonfinancial corporate businesses ($109 billion). Individual;households own little commercial paper directly, but they own commercial paper;indirectly through their ownership of money market funds and mutual funds.;The dominant role of money market funds and mutual funds as commercial paper investors is relatively new. Money market funds emerged in the 1970s;as an alternative to bank deposits that paid regulated interest rates below marketdetermined rates on commercial paper. Over time, money market funds grew in size;and totaled $2.4 trillion at the start of 2007 (Federal Reserve Flow of Funds data).;An important characteristic of money market funds is that, contrary to bank;deposits, investments in money market funds were not traditionally insured by the;government. Although money market funds seek to preserve the value of an investment at $1 per share, it is possible that investors in money market funds can realize;a loss on their investments. The main risks faced by money market funds include;changes in interest rates and default on their investments (for example, defaults on;commercial paper).;To limit risks of money market fund investments, commercial paper holdings;of money market funds are regulated under Rule 2a-7 of the Investment Company;Act of 1940. Rule 2a-7 limits commercial paper holdings of money market funds to;commercial paper that carries either the highest or second-highest rating for shortterm debt from at least two of the nationally recognized credit rating agencies.;Money market funds must not hold more than 5 percent of their assets in securities of any individual issuer with the highest rating and not more than 1 percent;of their assets in securities of any individual issuer with the second-highest rating.;Also, total holdings of securities with the second-highest rating must not exceed;36;Journal of Economic Perspectives;5 percent of the funds assets. Notably, the rules requiring diversification reduce;exposure to idiosyncratic risk but cannot reduce exposure to systematic risk which;affects all commercial paper issuers at the same time.;Importantly, these regulations prevent money market funds from purchasing;long-term assets such as mortgage-backed securities. However, the availability of;asset-backed commercial paper provided money market funds with an opportunity to invest in such securities indirectly. In fact, some observers argue that the;growth of the asset-backed commercial paper market was fuelled by demand from;money market funds, which eventually spurred the rise in housing prices before;the financial crisis. As a result, the asset-backed commercial paper market enabled;transforming short-term assets into long-term assetsa function which is typically;reserved for financial institutions operating under strict bank regulations.;To analyze the importance of commercial paper for money market funds, we;use data provided by iMoneyNet. These data are the most comprehensive source;of money market funds asset holdings and cover, among others, all taxable money;market funds, representing 84.5 percent of money market fund holdings. We focus;on taxable money market funds because nontaxable money market funds hold;primarily tax-exempt instruments issued by state and municipal governments.;As of January 2007, there were 473 taxable money market funds holding assets;worth $1.95 trillion. About one-third of the funds were Treasury funds, which hold;almost exclusively government debt and government-backed agency debt. The;other two-thirds were prime funds that also invest in nongovernment assets such;as commercial paper. In January 2007, the largest asset class held by money market;funds was commercial paper, accounting for $634 billion or 32.5 percent of total;asset holdings. The other asset classes included government debt and governmentbacked agency debt ($585 billion), repurchase agreements ($390 billion), bank;obligations ($297 billion), and other assets ($45 billion).;Most large money market funds are geared towards institutional investors. A;study by Moodys Investor Service (2007a) shows that in January 2007, the largest 15;institutional prime funds accounted for a total of $459 billion worth of assets. Institutional prime funds hold a large number of different money market instruments;and money market funds are therefore considered well diversified. Nevertheless;money market funds are highly exposed to risks in the financial industry as whole.;Assets originated by the financial industrymeasured as the total of financial;commercial paper, structured securities, bank obligations, and repurchase agreementsaccounted for 91.4 percent of money market fund assets.;Commercial Paper during the Financial Crises;Commercial Paper and Financial Crises in Historical Perspective;Although the commercial paper market is generally a stable source of;financing, periodically there have been large and sudden declines in its size.;The most prominent example is the Penn Central failure (for discussion, see;When Safe Proved Risky: Commercial Paper during the Financial Crisis of 20072009;37;Calomiris, 1994, Calomiris, Himmelberg, and Wachtel, 1995). In June 1970, the;transportation company Penn Central declared bankruptcythe largest corporate bankruptcy up to that pointand as a result of its bankruptcy, defaulted on;its commercial paper. Once Penn Central defaulted, investors lost confidence;in other corporate commercial paper issuers and stopped refinancing maturing;commercial paper. Within three weeks of Penn Centrals bankruptcy, corporate;commercial paper outstanding dropped by more than 9 percent, from $32 billion to $29 billion. The Federal Reserve responded by lending aggressively to;banks through the discount window, which alleviated liquidity constraints and;stabilized the market.;After the Penn Central failure, and largely as a result of it, corporate commercial;paper issuers started purchasing insurance against market-wide liquidity disruptions;in the form of backup loan commitments. Within a few years after the crisis, almost;all corporate commercial paper issuers held backup loan commitments covering;100 percent of outstanding commercial paper. The loan commitments were issued;by banks through which the Federal Reserve had administered its lending during;the crisis. This arrangement improved the safety of the corporate commercial paper;market for two reasons: 1) banks have access to the discount window, and 2) banks;typically experience deposit inflows during periods of market-wide liquidity disruptions (Gatev and Strahan, 2006). However, the backup loan commitments increase;the riskiness of the financial sector as a whole because the risks of market-wide disruptions are effectively insured by the financial sector.;Similar episodes of declines in the size of commercial paper market have;occurred since Penn Central. Typically in such cases, a single commercial paper;issuer experiences a negative shock which reduces investors confidence in other;commercial paper issuers. The common element of such episodes is that they;appear suddenly and lead to large, usually temporary contractions in the market;size. For example, the failure of the energy company Enron in 2001 raised concerns;about the quality of financial reporting and led to a sharp decline in outstanding;corporate commercial paper. However, an important difference between all such;episodes and the financial crisis of 20072009 is that the former concerned the;corporate commercial paper market rather than the financial or the asset-backed;commercial paper market.;Collapse of the Asset-backed Commercial Paper Market;The decline in the asset-backed commercial paper market was triggered by;the crisis in the subprime mortgage market. Although delinquencies on subprime;mortgages had been rising through most of 2006, the financial crisis showed its;first clear signs only in summer 2007. On July 31, 2007, two Bear Stearnss hedge;funds that had invested in subprime mortgages filed for bankruptcy. A third Bear;Stearnss hedge fund suspended investors redemptions. In the following week;more news about delinquencies in subprime mortgages hit the market. On August;7, 2007, BNP Paribas halted withdrawals from its three investment funds and;suspended calculation of their net asset values.;38;Journal of Economic Perspectives;Figure 1;Commercial Paper Outstanding, January 2004October 2009;Paper outstanding (in $ billions);1,200;Asset-backed;Financial;Corporate;1,000;ABCP market;collapse;Lehmans;bankruptcy;800;600;400;200;0;9;00;/2;/7;10 009;2;7/ 09;7/ 20;7/ 9;4/ 00;2 8;7/ 00;1/ /2;/7;10 008;2;7/ 8;7/ 200;7/ 8;4/ 00;2;7/ 007;1/ /2;/7 7;10 00;2;7/ 7;7/ 200;7/ 7;4/ 200;7/ 06;1/ /20;/7 6;10 00;2;7/ 6;7/ 200;7/ 6;4/ 200;7/ 05;1/ /20;/7 5;10 00;2;7/ 05;7/ 20;7/;4/ 005;2;7/ 004;1/ /2;/7 4;10 00;2;7/ 4;7/ 200;7/ 4;4/ 200;7/;1/;Source: Authors analysis based on Federal Reserve Board data.;Note: Figure 1 shows the weekly commercial paper outstanding. The asset-backed commercial paper;(ABCP) market collapse was August 9, 2007. Lehmans bankruptcy was September 15, 2008.;As a result of these announcements, investors in asset-backed commercial;paper became concerned that the collateral backing asset-backed commercial;paper might be of a lower quality than they initially thought. Consequently, many;investors stopped refinancing maturing commercial paper, and within two days;the spread on overnight asset-backed commercial paper over the federal funds;interest rate increased from 10 basis points to 150 basis points. Because of the;credit guarantees, sponsoring financial institutions had to provide liquidity to;pay off maturing asset-backed commercial paper. This obligation raised concerns;about counterparty risk among banks and caused interbank lending rates to shoot;upwards. The crisis in asset-backed commercial paper quickly spread across the;financial sector and affected banks worldwide (Acharya and Schnabl, 2009).;As shown in Figure 1, from August 2007 to August 2008, the value of assetbacked commercial paper outstanding fell by 33.1 percent, from $1.18 trillion to;$789 billion. These numbers likely understate the actual decline in demand for;asset-backed commercial paper because credit guarantees often required sponsoring banks to purchase asset-backed commercial paper directly.;Even though asset-backed commercial paper outstanding decreased, issuance;of asset-backed commercial paper actually increased in late August 2007, as shown;in Figure 2. Average daily issuance of asset-backed commercial paper increased;from $71 billion in early August 2007 to $106 billion in early September 2007.;At the same time, however, average maturity of asset-backed commercial paper;Marcin Kacperczyk and Philipp Schnabl;39;Figure 2;Commercial Paper Issuances, January 2004October 2009;120;Paper issued (in billions);100;Asset-backed;Financial;Corporate;ABCP market;collapse;Lehmans;bankruptcy;80;60;40;20;0;9;00;/2;/2 9;10 200;2/ 9;7/ 200;2/ 9;4/ 200;2/ 08;1/ /20;/2 8;10 200;2/ 8;7/ 00;2;2/ 8;4/ 200;2/ 07;1/ 20;/;/2 7;10 200;2/ 7;7/ 200;2/ 7;4/ 200;2/ 06;1/ /20;/2 6;10 200;2/ 6;7/ 200;2/ 6;4/ 200;2/ 05;1/ 20;/;/2 5;10 200;2/ 5;7/ 200;2/ 5;4/ 200;2/ 04;1/ 20;/;/2 4;10 200;2/ 4;7/ 00;2;2/ 4;4/ 200;2/;1/;Source: Authors analysis based on Federal Reserve Board data.;Note: Figure 2 shows a five-day rolling-window average of commercial paper issuances. The assetbacked commercial paper (ABCP) market collapse was August 9, 2007. Lehmans bankruptcy was;September 15, 2008.;decreased sufficiently to more than offset the increase in issuance, thus resulting in;an overall decline in commercial paper market size. Figure 3 further shows that the;spread between overnight asset-backed commercial paper and the federal funds;interest rate spiked up shortly after the crisis started. While in the year before the;crisis the average spread equaled 3 basis points, in the year after the crisis the average spread rose to 46 basis points.;The decrease in outstanding asset-backed commercial paper, combined with;the increase in its spread, suggests that the decline was likely caused by a drop in;demand for, rather than supply of, asset-backed commercial paper. In line with this;interpretation, several money market funds reported that they had reduced their;holdings of asset-backed commercial paper to mitigate the risk of negative publicity, which could trigger withdrawals by investors (Moodys Investor Service, 2007b).;Covitz, Liang, and Suarez (2009) show that conduits with the weakest credit;guarantees had the largest difficulties in rolling over their maturing asset-backed;commercial paper. For example, from July to December 2007, total asset-backed;commercial paper issued by structured investment vehicles fell from $84 billion to;$15 billion. Acharya, Schnabl, and Suarez (2009) further demonstrate that credit;guarantees covered almost all of the maturing as


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