Appendix 7 — The Pre-Crisis Backstop of the Shadow Credit Intermediation Process — The Case of FHCs

Appendix 7. Before the crisis the FHC chain was privately enhanced. Only step 1 (loan origination) was officially backstopped — by FDIC deposit insurance (credit put) and the Fed discount window (liquidity put). The remaining steps were privately enhanced: consortia of commercial banks wrote liquidity puts (credit lines) to conduits, SIVs and the tri-party clearing banks; mortgage insurers, monolines and AIG-FP wrote credit puts on loans, ABS and CDOs. When these puts were questioned, collateral fell, ABCP couldn’t roll, and funders tapped the interbank market — sending Libor soaring.