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CHAPTER Montreal Accord Under the Montreal Accord, investors agreed to a standstill period (initially 60 days, to October 16, 2007, extended three times to February 22, 2008), with the objective of restructuring the frozen ABCP into long-term floating rate notes with maturities matching the maturities of the underlying assets in the conduits However, the agreement had to be renegotiated again 16 months later, in December 2008, with the participation of the federal government and High-Profile Firms Fail Financial Crises and the Subprime Meltdown 209 three provinces (Ontario, Quebec, and Alberta), where publicly owned institutions held over $20 billion of frozen non-banksponsored ABCP Small investors (holding less than $1 million of the paper) were fully paid out in cash by the brokerage firms that had sold them the paper, whereas the larger investors were given bonds The final cost of the ABCP restructuring was in excess of $200 million in fees, with the big investors footing the bill In March of 2008, Bear Stearns, the fifth-largest investment bank in the U.S., which had invested heavily in subprime-related securities, had a run on its funding and was forced to sell itself to J.P Morgan for less than 5% of what it was worth just a year earlier In order to broker the deal, the Federal Reserve had to take over US$30 billion of Bear Stearns hard-to-value assets In July, Fannie Mae and Freddie Mac, the two privately owned government-sponsored enterprises that together insured over US$5 trillion of mortgages or mortgage-backed assets, had to be propped up by the U.S Treasury and the Federal Reserve after suffering substantial losses from their holdings of subprime securities In early September 2008 they were then put into conservatorship (in effect run by the government) Worse events were still to come On Monday, September 15, 2008, after suffering losses in the subprime market, Lehman Brothers, the fourth-largest U.S investment bank by asset size (with over $600 billion in assets and 25 000 employees), filed for bankruptcy, making it the largest bankruptcy filing in U.S history The day before, Merrill Lynch, the third-largest investment bank (which also suffered large losses on its holding of subprime securities), announced its sale to Bank of America for a price 60% below its price a year earlier On Tuesday, September 16, AIG, an insurance giant with assets over US$1 trillion, suffered an extreme liquidity crisis when its credit rating was downgraded It had written over US$400 billion of insurance contracts called credit default swaps that had to make payouts on possible losses from subprime mortgage securities The Federal Reserve then stepped in with a US$85 billion loan to keep AIG afloat (later increased to US$150 billion) Also on September 16, as a result of its losses from exposure to Lehman Brothers debt, the Reserve Primary Fund, a large money market mutual fund with over US$60 billion of assets, broke the buck that is, it could no longer redeem its shares at the par value of $1 A run on money market funds then ensued, with the U.S Treasury putting in place a temporary guarantee for all money market mutual fund redemptions in order to stem withdrawals On September 25, 2008, Washington Mutual (WAMU), the sixth-largest bank in the United States with over US$300 billion in assets, was put into receivership by the FDIC and sold to J.P Morgan, making it the largest bank failure in U.S history
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