Gerald P. Dwyer and Paula Tkac
Working Paper 2009-20
August 2009

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We explore how a relatively small amount of heterogeneous securities created turmoil in financial markets in much of the world in 2007 and 2008. The drivers of the financial turmoil and the financial crisis of 2008 were heterogeneous securities that were hard to value. These securities created concerns about counterparty risk and ultimately created substantial uncertainty. The problems spread in ways that were hard to see in advance. The run on prime money market funds in September 2008 and the effects on commercial paper were an important aspect of the crisis itself and are discussed in some detail.

JEL classification: G01, G21, G23, G28

Key words: financial crisis, contagion, collateralized debt obligations, ABX, money market funds

The authors thank participants at the Journal of International Money and Finance global finance conference for helpful comments. They also thank the referee Richard Meese as well as Christian Gilles and Charles Smithson for comments on an earlier draft. Gilles and Smithson, as well as Paul Kupiec earlier, provided important assistance in helping them understand the ABX index of collateralized debt obligation prices. They have benefited from continued discussion of these issues over the last two years with colleagues in the Atlanta Fed's research department, especially Mark Fisher, Scott Frame, Mark Jensen, Cesare Robotti, and Larry Wall. They also have benefited from research assistance by Budina Naydenova and Ellyn Terry and general assistance by Linda Mundy. An earlier version of this paper also was presented at Rensselaer Polytechnic Institute and at the Western Economic Association meeting; the authors thank the participants for helpful comments. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Gerald P. Dwyer, Center for Financial Innovation and Stability, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 404-498-7095, 404-498-8810 (fax), and University of Carlos III, Madrid, Departamento de Economía de la Empresa, Calle Madrid, 126, 28903 Getafe, Madrid, Spain,, or Paula Tkac, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 404-498-8813, 404-498-8810 (fax),

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