MERCATUSWORKINGPAPERMERCATUS.MERCATUSWORKINGPAPERMERCATUS.ORGREGULATION,CDOEXPOSURES,ANDDEBTGUARANTEESTHROUGHTHEFINANCIALCRISISStephenMatteoMiller,MercatusCenterSTEDCITATIONJanuary023.STRACTssOranteesforBHCsKeywords:bankcapitalrequirements,collateralizeddebtobligations,debtguarantees,too-big-to-failsubsidiesAUTHORCONTACTINFORMATIONKNOWLEDGMENTSankCDOMarketCrashExposureemicrorasonUniversity3Regulation,CDOExposures,andDebtGuaranteesthroughtheFinancialCrisisStudieshavedocumentedtheextremelypoorperformanceofcollateralizeddebtobligationsbackedbyasset-backedsecurities(ABSCDOs)duringthe2007–2009crisis(seeBarnett-Hart2009;HullandWhite2010;Cordelletal.2012;Wojtowicz2014;andCordelletal.2019).Yet,theseinstrumentsoftengetovershadowedinpostcrisispolicydebates(seeLo2012).Changestorisk-basedcapitalrequirements,includingthe2001RecourseRule,whichfavoredholdingpartsofdealswiththehighestrating,alsogetovershadowedindebatesanddiscussionsaboutwhatwentwrong.Inwhatfollows,IbrieflyreviewhowABSCDOsfitwithinthefinancialsystem,thenshowhowthesupplyofABSCDOsgrewafterchangestoregulatorycapitalrequirementsthatfavoredholdingthem.Ithenshowhowlargebankholdingcompanies(BHCs)withsubsidiariesthatsubmittedcommentlettersduringtheRecourseRulerulemakingprocessonaveragehadhigherestimatedmarked-to-marketvaluesofwhatitwouldcosttoinsurethefacevalueofshort-termdebtoncethecrisisunfolded;thesedebtguaranteesreflectbankdistressandprovideestimatesofthetoo-big-to-fail(TBTF)subsidies,whichmaydifferfromactualtransfersfromthegovernmenttobanks.ThesmallersubsetofRecourseRulecommentingBHCsthatissuedCDOsonaveragehadevenlargerestimateddebtguaranteesoncethecrisisunfolded.Lastly,giventhatBHCsreportedholdingsofCDOsastradingassets(assetsusedintradestogeneraterevenuesforbanks)onlyfromQ12008throughQ12009,IshowthatCDOholdings,morethanothertradingassetclasses,hadthelargestassociationwithestimateddebtguarantees.TheseresultspointtoregulatorycapitalrequirementsasadriverofthedemandforsecuritiesthatcontributedtolargeBHCdistress.TounderstandfactorsdrivingthedemandforCDOtranches(theFrenchwordfor“slices”)byBHCsEreletal.(2014)suggestthata“securitizationbyproduct”effectexists,wherebysecuritizingbanksactiveinissuingdealsalsohadreasonstoholdpartsoftheirownandotherbanks’deals.Forinstance,holdingpartsofabank’sowndealcouldsignalconfidencetopotentialinvestors,andfamiliaritywithstructuringsuchdealsmightalsomakepartsofotherbanks’dealsattractive.Asaresult,newissuancealsocreatedBHCdemand,exposingBHCstotheirowndealrisksandtorisksofsimilardealsissuedbyotherbanks.Moreover,the2001RecourseRuleforBHCs,amongotherthings,loweredcapitalrequirementsforcommercialbankholdingsofhighlyrated,private-labeltranches(seeAcharyaandRichardson2009;JabloeckiandMachaj2009;Friedman2009;Kling2009;FCIC2011;FriedmanandKraus2011;Kraus2011;Ereletal.2014;andMiller2018).Thereductioninrequiredcapitalfollowedtwonoticesofproposedrulemaking(NPRs).The1997NPRcalledforlinkingriskweightsforprivatelabelsecuritizationtranchestoratingsbyNationallyRecognizedStatisticalRatingOrganizations(NRSROs)todetermineminimumcapitalrequirements.The2000NPRrepeatedthecallforlinkingriskweightstoratings.ItalsoproposedadoptinganearlyversionofBaselIIriskweightsfordeterminingsecuritizationtranchecapitalchargesthatloweredcapitalchargesforthehighestratedtranchesevenbeforeBaselIIguidelineswerefinalizedbytheBaselCommitteeonBankingSupervisionin2004.Thefinalruleincorporatedtheseproposedchanges,whichmadetheprivate-labelAAA-ratedsecuritizationtranchesattractivetoBHCs.ToexaminetheroleoftheRecourseRuleandABSCDOsempirically,IfirstcreatedailyseriesoftotalcumulativeABSCDOissuanceandtotalcumulativeABSCDOissuanceforthetopfiveUSinvestmentbanksandthefourlargeUSBHCissuers;almostallUSissuanceoriginatedfromtheseninebanks.IthenestimatebreakpointsusingtheBaiandPerron(2003)method.Fortotal(global)andUScommercialbankissuancebutnotforinvestmentbankissuance,thefirstbreakpointappearsclosetothefirstpublicreleasedateoftheRecourseRule,beforeitwaspublishedintheFederalRegister,whichmakessensebecausetheinvestmentbankswerenotsubjecttotherule.BecausethesefindingspointtocapitalrequirementsasapossibledriverofABSCDOissuance,IalsoexaminetheroleoftheRecourseRuleonthemarked-to-marketdebtguaranteesestimatedusingMerton’s(1974,1977)option-theoreticapproachsimilartoMilne(2014).IestimatedynamictreatmenteffectsusingMoraandReggio’s(2019)averagetreatmenteffects.ThetreatmenteffectssuggestnodifferencesintheestimateddebtguaranteesuntilQ22008,afterwhichtheaveragetreatmenteffectsriseto$3.49billionforBHCsthatcommentedontheRecourseRuleand$6.73billionforthesubsetofthoseBHCsthatwerealsolargeABSCDOdealers.Thatthedynamictreatmenteffectsriselateinthesamplesuggeststhattheestimateddebtguaranteescouldhavecomeasasurpriseandwellaftertheonsetofthecrisis,althoughasNagelandPurnanandam(2020)show,themethodusedtoestimatemarked-to-marketdebtguaranteesheremayunderstatetheirsize.ThesefindingssuggestalinkbetweenCDOholdingsandtheRecourseRule.ForanyBHC,theRecourseRulewouldhavemadehighlyratedsecuritizationtranches,includingCDOtranches,moreattractivetohold,andthereforeanyBHCparticipatinginthenotice-and-commentperiodwouldhaveexpressedinterestinholdingsuchtranches.Furthermore,thefourlargeBHCCDOissuers,whichsubmittedcommentsontheRecourseRuleNPRs,wouldhavehadexposuretoCDOtranchesthroughthesecuritizationbyproducteffect.ToprovidemoredirectestimatesoftheeffectsofCDOholdingsonestimateddebtguarantees,IusethelimitedamountofdataonCDOholdingsduringQ22008–Q12009fromBHCcallreportstoestimatethesensitivityofthedebtguaranteetosharesofvarioustradingassetcategories,includingCDOs.Ifindthat,onaverage,thehandfulofBHCsthatreportCDOholdingshavea$2billionhigherestimateddebtguarantee.Asarobustnesscheck,IalsouseParenteandSilva’s(2016)quantileregressionestimator.Atthe10thpercentiledebtguarantee,BHCsthatreportCDOholdingsdonothaveahighersubsidy.However,atthemedian,BHCsthatreportCDOholdingshavea$1.74billionhigherdebtguarantee,andatthe90thpercentile,BHCsthatreportCDOholdingshavea$4.20billionhigherdebtguarantee.ThisasymmetryrevealstheheterogeneityacrossthedistributionoftheestimateddebtguaranteestoCDOexposures,suggestingthatCDOholdingshadadisproportionateassociationwiththehighestestimatesofthedebtguarantees.Tradingassets,generally,havereceivedmuchattentionintheaftermathofthecrisis,wherebylegislatorsandregulatorshavesoughttocurbsuchactivitiesthroughtheVolckerRule.IthereforeincludeestimatesoftradingassetsfromBHCcallreportdataunderthe2013and2019versionsoftheVolckerRule.Ifindthat,onaverage,a1percentagepointincreaseintheshareof2013VolckerRuletradingassetsisassociatedwithonlya$21millionhigherdebtguarantee,whereasa1percentagepointincreaseintheshareof2019VolckerRuletradingassetsisassociatedwithonlya$68millionhigherdebtguarantee.Thedebtguaranteemayhavealargerassociationwithtradingassetsunderthe2019VolckerRulethanunderthe2013VolckerRule,whichcouldsuggestthatrevisingtherulemightleadtogreaterdebtguarantees.However,theassociationwithCDOtrancheholdingsisordersofmagnitudelargerthanthatforeachtradingassetmeasure.Takentogether,thesefindingscouldbeconsistentwiththeideathatCDOholdings,specifically,ratherthantradingassets,generally,wereakeysourceoftheTBTFproblemduringthe2007–2009crisis.Othercategoriesofsecuritiesandexplanatoryvariableshavelittleassociationwiththeestimateddebtguarantee.Iexaminesomeofthefinancialinnovationsandregulatorychangesthattookplacebeforethebankingcrisis;thenIdiscussthehypothesesandempiricalresults;andthenIconclude.2.ONTHERISEOFCDOSANDCOMMERCIALBANKEXPOSURES.1CDOsandTheirAttributesIngeneral,CDOs,includingABSCDOs,havefourattributes:(1)theirpurpose,(2)theassetsheldascollateral,(3)theliabilitiesissued,and(4)theircreditstructure(seeLucasetal.2007).Intermsofpurpose,leadinguptothebankingcrisis,assetmanagersmightcreateCDOsforarbitragepurposestogenerateassetsundermanagement.Managerscangeneratefeesfromtheseassets.Alternatively,asassetsellers’banksmaycreateCDOstoreducethesizeoftheirbalancesheet,reducetheamountofrequiredcapital,ortolowerfundingcosts.Lastly,bankholdingcompaniesmightcreatethemasaformofTier1regulatorycapital,asinthecaseofTrustPreferredSecurities,whichtheFederalReserveallowedforholdingcompaniesbutwhichwasprohibitedbytheFederalDepositInsuranceCorporation(FDIC)forbanks(Cordelletal.2011).TheassetsusedascollateralinCDOdealsincluderiskydebt,suchasloans,bonds,orsecuritizationtranches,whichgenerateincomestreams.Cordelletal.(2012)reportthatabout$1.4trillioninCDOswereissuedbetween1998and2007.TheyexplainthatakeysubsetofCDOs—whichlayattheheartofthefinancialcrisis—namelyABSCDOs,compriseRule144Aunregisteredsecuritiesthatprivatecompaniesmayselltoqualifiedinstitutionalbuyers.Theyalsoshowthatofthe$641billionofABSCDOsissuedbetween1999and2007,about$440billionofthecollateralcamefromsecuritizationtranches,and$201billionin“synthetic”collateralincludedcreditdefaultswaps(CDSs).CDSsofferprotectiontothebuyeragainstdebtdefaultandgenerateincomestreamstothesellerinexchangeforacquiringthedebtintheeventofdefault.Ifonebreaksdownthe$641billioninABSCDOsintermsofthequalityoftheassets,then$322billionwasincludedinhighgradedeals,$288billionwasincludedinlowerrated“mezzanine”deals,and$31billion($20billioninhighgradeand$11billioninlowgrade)wasCDO-squareds,orCDOsbackedwithotherCDOtranches.TheassetmanagersinarbitragedealsorassetsellersinbalancesheetdealsworkwitheitherinvestmentbanksorstructurerstoarrangetheCDOdealbycreatingacorporateentitythathousestheassets(seeLucasetal.2007).Theincomestreamsfromthoseunderlyingassets,inturn,getredistributedtovariousinvestorsholdingdebtandequitytranchesissuedbythedeal.Theinvestorsmightbebanksretainingaportionofthedeal,ortheymightbeotherbanks,insurancecompanies,hedgefunds,orpensionfundsthatseektoholdmarketabledebt.IntermsofliabilitiesinCDOdeals,thetranchessoldtoinvestorsreflecttheriskarisingfromreprioritizingincomingpaymentflowsina“waterfall”mannerinthesensethattheliabilitiesreceivepaymentsinorderoftheirrating.Thehighest-ratedtranchesreceivepaymentfirstandthelowest-rateddebttranchereceivespaymentlast.Theequitytranche,whichdoesnotgetratedasthetranchethattakesfirstlosses,mightideallyseembestsuitedfortheoriginatingbank.However,Gibson(2004)highlightstheroleofthedefaultcorrelationfordealcollateralanditseffectsonthevalueofthetranches.Ontheonehand,ahigherdefaultcorrelationincreasesthechancethattheequitytranchewillgetwipedoutandthattheseniortranchewillexperiencesomelosses.Therefore,thevalueoftheseniortranchedeclineswithdefaultcorrelation.Ontheotherhand,ifthedefaultcorrelationishigher,there’salsoagreaterchancethattherewillbefewdefaults.Giventhatequitytranchesgainmoreinalow-defaultscenariothantheyloseinahigh-defaultscenario,thevalueoftheequitytrancheincreaseswithdefaultcorrelation.Asaresult,asEreletal.(2014)observe,incaseswhenabankarrangesthedeal,thebankcouldsignalconfidenceinthedealtootherinvestorsbyholdingthehighest-ratedtranchesratherthantheequitytranches,whichmightinsteadgetsoldtohedgefunds.Iwilldiscusslaterhowchangesinregulatorycapitalrequirementsalsomadeholdingthehigher-ratedtranchesmoreattractivetoBHCs.Lastly,CDOdealsofferadditionalprotectionthroughtheircreditstructure,eitherintheformofcash-flowormarket-valueprotections(Lucasetal.2007).Cash-flowprotectionsrelyonvercollateralizationandinterestcoveragetestsOvercollateralizationtestscheckthesizeofassetteralagainstthesizeofatrancheaswellasallothertranchesaboveitthelargertheratiothemoreprotectionforinvestorsSimilarly,theinterestcoveragetestcheckstheamountofinterestduefromthedealsassetsrelativetotheinterestduefromaparticulartrancheaswellasallothertranchesaboveit;thelargertheratiothemoreprotectionforinvestors.Lesscommonmarket-valueprotectionsworktolimittheamountborrowedagainstassetsinthedealastheassets’riskrises.2.2TheEvolutionofCDOsandCDOMarketCrashesThefirstCDO-liketransactionsbeganwithcollateralizedbondobligations(CBOs)thatDrexelBurnhamLambertcreatedusinghigh-yieldbondsascollateralbeginningin1987(Lucasetal.2007,chap.1).Das(2005)andTavakoli(2008)observethatinsurancecompaniesalsousedCBOstolowertheirassets’capitalcharges,whichdifferfrombankcapitalcharges;Merrilletal.(2019)showempiricallyhow,leadinguptothe2007–2009crisis,insurance-capital-constrainedinsurancecompaniesfavoredholdinghighlyratedsecuritizationtranches.Shortlythereafter,similarcollateralizedloanobligationdealsemergedwithavarietyofloansusedascollateral(Lucasetal.2007,chap.1).Ontheliabilitiesside,akeyevolutionoccurredafterthesavingsandloan(S&L)crisis.InresponsetotheS&Lcrisis,CongressestablishedtheResolutionTrustCorporation(RTC)insection501oftheFinancialInstitutionsReform,Recovery,andEnforcementActof1989(Pub.Law101-73;103Stat.183).TheRTChadasitsobjectivetoassumemortgages,realestate,andfailedS&Ls(FDIC1998;Tavakoli2008,84;FCIC2011,69–71).BeforetheRTC,private-labelsecuritizationshadstraightforwardstructures.Forinstance,earlysecuritizationsmighthavetwotranches,oneratedhigherandtheotherratedlower.BecausetheRTChaddifficultysellingS&Ldebt,theyintroducedmorecomplextranchesstructurestoattractinvestors(FDIC1998),andtheprivatesectorhasadoptedandadaptedthatpracticesincethen.Anunexpectedincreaseinthetargetfederalfundsratein1994resultedinturmoilinavarietyoffixed-incomemarkets,andasaresult,structurednotesbackedbyavarietyofbondsalsoexperiencedlosses(Partnoy2009;O’Malley2015).Partnoy(2009)explainsthatleadinguptothe1994–1995“TequilaCrisis,”investmentbankscreatedcredit-linkedstructurednotesbackedbyemergingmarketsovereigndebt,denominatedinthelocalcurrency.ThestructurednotespaidinvestorsinUSdollarsafterconvertingthelocalcurrencybondreturnsatthecurrentmarketexchangerate.Thepracticeinvolvedfindingasuitable“speculative-grade”emergingmarketsovereigndebtproduct,writingupthedetailsofthecontract,andtryingtoconvincetheNRSROstoratetheproductsashighinvestmentgrade.Forexample,withaMexicanstructurednote,oncetheratedproductgotsoldtoinvestors,aslongastheBancodeMéxicomaintainedthepeso-dollarpeg,thepayoffwasattractivetoinstitutionalinvestors;investorslostout,however,whenthepeso-dollarpegcollapsed.TheendresultoftheTequilaCrisiswassimilartowhatoccurredduringtherecentcrisis,withinvestorssufferingsignificantlossesafterpurchasinghighlyratedstructuredproductsthathadriskyassetsascollateral.Thepatterncontinuedshortlythereafter,andKregel(1998),Das(2005),andPartnoy(2009,afterword)observethatsimilarproductswentbustduringtheAsiancrisisin1997–1999andtheRussiancrisisin1998.7Therealizedlossesfromdealswithundiversifiedcollateralbetween1994–1998resultedinasearchfordiversifieddealsthroughso-calledmultisectorCDOs(Hu2007;FCIC2011).Hu(2007),FCIC(2011,130)andCordelletal.(2012)alsomentionthecollapseofthemultisectorCDOaroundthetimeofthetechnologysectorcrashin2000–2002,whichoccurredinspiteofthemorediversifiedcollateral.AlthoughmultisectorCDOsweredesignedtoincorporatethebenefitsofamorediversifiedassetpool,thepoolsoftenincludedprivateequityfees,whichdeclinedwiththetechnologysectorcrash,andairlineleases,whichdeclinedfollowingtheeventsofSeptember11,2001.Thesecrasheventsprompteddealerstosearchformorestablecollateral,whichhousing-relatedloansseemedtoprovide(FCIC2011).Dengetal.(2011)useGrangercausalityteststoshowthatCDOissuancedrovedowntheyieldsonmortgage-backedsecurities(MBSs)relativetoTreasuriesduringtheCDOmarketexpansion,andnottheotherwayaround;theyalsopointoutthatCDOpricingeffectslikelygotpasseddowntothemortgageborrowers,whichwouldhavespurredgrowthinthemortgagemarket.Inaddition,financialinnovationswithcreditriskmanagementgaverisetonewvariantsthatalsorevealedtheirfragilityduringthe2007–2009crisis.Das(2005,328–33)describesJPMorgan’sdealtohelpriditselfofcorporatecreditriskwiththefirstsyntheticsecuritizationofcorporatecreditriskin1997.Das(2005,369)alsodescribesJPMorgan’sdealtohelptheGermanCommerzbankgetcapitalreliefthroughthefirstsyntheticsecuritizationofmortgagedebttowardtheendof1998.ThisproducthadtranchesasliabilitiesasinatypicalCDO,buthere,CDSs,whichrepresentclaimstopurchasethecashequivalentvalueofthereferencedassetratherthantheassetitselfintheeventthatthereferencedassetdefaults,replacedthemoretraditionalbondsofsecuritizedassets.Therefore,theyreflectedbetsondefaultratherthancashflowsfrommortgageandotherconsumercreditproductsandfeaturedprominentlyamongABSCDOwritedowns(Cordelletal.2012).Ifonlyasmallfractionofhouseholdsstoppedmakingmortgagepayments,thedealswouldloseconsiderablevalue.Tounderstandhowthatmighthappen,MianandSufi(2009)find,amongotherthings,thatZIPcodeswithrelativelyhighlevelsofsubprimeborrowers(thosewithaFICOscorelessthan660)experiencedasignificantriseinmortgagedefaultsstartingin2006;thoseZIPcodestendedtohaveahigherproportionofsecuritizedloanstoo.GriffinandMaturana(2016a)confirmtheaforementionedfindinginMianandSufi(2009)andalsofindthatZIPcodesinwhichmortgageoriginatorsadopteddubiouspracticesalsoexperiencedhighermortgagedefaults.Also,GriffinandMaturana(2016b)findevidenceofappraisaloverstatements,owneroccupancymisreporting,andunreportedsecondliensinMBSloandata.Dengetal.(2011)alsoshowthat,asCDOissuanceslowed,theyield-spreadonMBSsandCDOsrose.However,thisrisedidnotaffectprivate-labelMBSperformancemuch,andOspinaandUhlig(2018)showthatoverall,private-labelMBSsissuedbyinvestmentandcommercialbanks,ratherthanthoseissuedbygovernment-sponsoredenterprises(GSEs),performedrelativelywell,evenduringthecrisis.Moreover,mostoftheAlt-AandsubprimelosseswereinsecuritiesratedlessthanAAA,especiallythosedeemednoninvestmentgrade,whichfactorsintoCDOperformance.Areductionintheflowofmortgagepaymentscouldaffectsecuritizationtranches,which,inturn,wouldgetaratingsdowngrade.AsCDOsoftenbundledassetstogetherthathadhighercorrelationofdefaultriskthanarrangersandNRSROshadassumed,mortgagedefaultsorevenaslowdowninhomepriceappreciationcouldadverselyaffectprivate-labelmortgageMBSsandwipeoutanentireCDOdeal(Cordelletal.2012).Thiseffectrelatestothewaydealswerestructured(Covaletal.2009a),astheytendedtopricecreditrisk—especiallysinceinsurancecompanyandpensionfundinvestorshaveregulatoryreasonstoseekhighlyratedsecurities—butaultlssimultaneously2.3RegulatoryChangesFavoringCDOsTable1providesatimelineofregulatorychangesthathaveimplicationsforthegrowthoftheCDOmarket.Morerecentdevelopmentswithbankcapitalregulationhavetendedtohaveabiastowardhighlyrateddebt.TheoriginsofthisbiasaroseintheaftermathoftheLatinAmericandebtcrisisin1982.Congresscalledfornewbankcapitalguidelines(Kapstein1994).Tounderstandwhy,onemustfirstunderstandthatawidelyheldbeliefatthetimewasthatbankcapitalhadaspectsofapublicgoodsuchthatsystem-wideincreaseswouldraiseconfidence,andCongressdidnotwanttobeseenasforcingUStaxpayerstobailoutthebanks,wantinginsteadtoforceshareholderstotakeresponsibility(Kapstein1991,13).Inaddition,anotherwidelyheldbeliefatthetimewasthatAmericanbankscouldbeatadisadvantagevis-à-vistheirforeigncompetitorswhenitcametocapitalrequirementsifonlyUScapitalrequirementsincreased,soCongresssoughtamultilateralratherthanunilateralchange.Toaddresstheseconcerns,CongresspassedtheInternationalLendingSupervisionActof1983(ILSAof1983;PublicLawNo.98-181;97Stat.1278)togetAmericanfinancialregulatorstobeginamultilateralpushtoaddresstheseconcerns.USregulatorsbeganlookingtowardEuropeforideasaboutcapitaladequacystandards.AfterseveralyearsofdeliberationsbetweenofficialsintheUnitedStatesandtheUnitedKingdom,Japaneseofficialsthenagreedtosignon,followedbyofficialsincontinentalEurope(Kapstein1991;Kapstein1994).Theendresultwasthe1988BaselIaccordoncapitaladequacy.selIandbankbankingpracticesAkeynisationigndebtwhichfromtheoutsetwasorGSEoragencyMBSsDasonsregulatorstsandexistingsknkoftheassetsTABLE1.RegulatoryandStatutoryChangestoCapitalTreatmentofSecuritizationsaryOfChangeJuly15,1988entralbankofficialsfromGroupof0countriesagreetoBaselIImplementedinUnitedStatesbetweenand1andappliedtoallUSbanksin1992,theframeworktsequalto5,and1.0,whichwereusedtoadjusttotalassetsusedtocomputethepercentminimumcapitalrequirementrelativetorisk-weightedassets.November29,2001(appearedpubliclyinprintonOctober25,2001)Risk-BasedCapitalGuidelines;CapitalAdequacyGuidelines;CapitalMaintenance:CapitalTreatmentofRecourse,DirectCreditSubstitutesandResidualInterestsinAssetSecuritizations(66Fed.Reg.59614),or“RecourseRule”shedriskweightsforprivatelabelMBSsandothersimilarlystructuredproductssuchasCDOsonthebasisofratingsForAAA-andAA-ratedsecurities,theriskweightwas2;forA-ratedsecurities,theriskweightwas;forBBB-ratedsecurities,theriskweightwasforBB-and-lower-ratedsecurities,theriskweightincreasedto.Beforetherule,theriskweightwaseither0.5or1.0.October1,2003(appearedpublicyinprintonSeptember4,2003)apitalGuidelinesCapitalAdequacyGuidelines;CapitalMaintenanceInterimCapitalTreatmentofConsolidatedAsset-BackedCommercialPaperProgramAssets(68Fed.Reg.56530)thABCPprogramswereallowedtotemporarilyexcludeassetsinthoseprogramsfromthecomputationofrisk-weightedassetsusedtoassesscapitaladequacy.TheinterimruleappliedtothereportingperiodsofSeptember30,2003;December31,2003;andMarch31,2004.ItwassettoexpireonApril1,2004.April6,2004publiclyinrintonAprilapitalGuidelinesCapitalAdequacyGuidelines;CapitalMaintenanceInterimCapitalTreatmentofConsolidatedAsset-BackedCommercialPaperProgramAssetsExtension(69Fed.Reg.2382)edtheinterimruleoncapitaltreatmentofconsolidatedABCPprogramassetsthroughJuly2004.July28,2004apitalGuidelinesCapitalAdequacyGuidelinesCapitalMaintenanceConsolidationofAsset-BackedCommercialPaperProgramsandOtherRelatedIssues(69Fed.Reg44908)einterimruleoncapitaltreatmentofonsolidatedABCPprogramassetspermanentstartingSeptember30,2004.SenateFebruary5;dinSenateMarch;passedinHouseApril005;enactedApril2005TheBankruptcyAbusePreventionandConsumerProtectionActof5PubLNo109-8,119Stat.23)avecounterpartiesinprivatelabelMBScollateralizedrepurchasingagreementstheabilitytotakepossessionofcollateralandterminatecontractsduringbankruptcy.Beforetheact,thiswaspossibleonlyinrepurchasingagreementscollateralizedbyagencyMBSsandUSTreasurysecurities.Source:Risk-BasedCapitalGuidelines;CapitalAdequacyGuidelines;CapitalMaintenance:CapitalTreatmentofRecourseDirectCreditSubstitutesandRes