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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Blog

May 16

Written by: Donald van Deventer
5/16/2011 12:41 AM 

Excellence in risk management and good corporate governance requires that financial institutions analyze their own probability of default. The proposed Basel III liquidity risk ratios are concrete symbols of the regulators’ focus on default risk. Liquidity risk is the symptom that a firm has some other severe disease, be it credit risk, market risk, interest rate risk, fraud or something else. Default becomes inevitable when it becomes apparent that an institution cannot liquidate its assets with sufficient speed or volume to meet cash needs from liabilities that have been withdrawn (in the case of deposits) or which will not be rolled over (commercial paper, bank lines, bonds, cancelled insurance policies and so on).  For an institution which hasn’t failed, data from institutions that have failed or which have had “near death experiences” usually provide more insights on liquidity risk that the institution’s own history of liability amounts and costs.

This blog features the funding short-falls at AIG during the credit crisis for exactly that reason.

Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis.  These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century.  This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base.

The data used in this analysis is described in more detail below. The data consists of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included. 

This blog entry lists the borrowing by AIG that was identified by the Fed as “primary, secondary, or other extensions of credit” between February 8, 2008 and March 16, 2009.  Borrowings under this facility clearly represent a funding shortfall and an excellent measure of the degree to which liquidity was insufficient.

Note that, on February 28, 2008, AIG announced a $5.2 billion loss for the fourth quarter of 2007, its second consecutive quarterly loss. AIG announced write-downs of $11.12 billion pretax on its credit default swap portfolio at the same time. (Source:

The primary, secondary, or other extensions of credit by the Federal Reserve to AIG during the period February 8, 2011 to March 16, 2009 can be summarized as follows:

Borrowing dates:                 Continuous from September 16, 2008
Average from
2/8/2008 to 3/16/2009        $72.8 billion
Average when Drawn         $161.2 billion
Maximum Drawn                 $208.6 billion

Kamakura Risk Information Services version 5.0 Jarrow-Chava default risk models showed a cumulative 5 year default probability for AIG of 65.34% on the date of its first Fed borrowing, September 16, 2008:

The pattern of total outstanding borrowings from the Federal Reserve shows a steady increase from the first borrowing date on September 16, 2008:

In addition to these borrowings (“primary, secondary or other extensions of credit” from the Federal Reserve, AIG-related entities were substantial beneficiaries of support from the Commercial Paper Funding Facility run by the Federal Reserve.  In a separate release available at the link below, the Federal Reserve lists these commercial paper transactions by AIG-related entities that were funded by the Federal Reserve:

Implications of Funding Shortfall Data

The AIG borrowings in the form of “primary, secondary, and other extensions of credit” were extraordinary in both amount and in duration.  The borrowings under the Commercial Paper Funding Facility, while less dramatic, are further confirmation that the liquidity risk and funding shortfall at AIG were very large.  Every careful risk manager whose institution participates in the credit markets and securitized asset markets like AIG should have no illusions about the liquidity risk that can arise when large losses are incurred on the asset side.

Background on the Federal Reserve Data

A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:

Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed.  This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above.  These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.

Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:

  • From Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
  • Kamakura converted each report to spreadsheet form
  • These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
  • Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
  • To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.

For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at  Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
May 16, 2011