CDS IndexCo and Markit launched the ABX.HE index to let investors buy and sell credit default swap (CDS) protection on baskets of subprime mortgage-backed securities without owning the bonds. As ABX prices fell later, they became a widely watched market signal that subprime mortgage credit was worsening. The index also made it easier to build and hedge complex structures such as CDOs.
Bear Stearns’ High-Grade Structured Credit Strategies Enhanced Leverage fund stopped investors from withdrawing money as losses and funding pressure mounted. The action highlighted how hard it had become to value and finance mortgage-linked assets, including CDO holdings. It also signaled that problems in subprime-linked securitization were spreading beyond mortgage lenders into Wall Street investment vehicles.
Moody’s downgraded hundreds of subprime residential mortgage-backed securities (RMBS), and S&P put hundreds more on negative watch for downgrade. These rating actions forced many investors to reassess risk, triggered sales and margin demands, and undermined CDO structures that relied on highly rated RMBS tranches as collateral. The downgrades accelerated the freeze in new subprime securitization issuance.
After losing most of their value, Bear Stearns’ two structured credit hedge funds entered bankruptcy proceedings (reported in policy summaries as bankruptcy petitions filed in early August 2007). Their collapse showed how leveraged holdings of mortgage-related CDO exposures could unravel quickly when short-term lenders demanded more collateral. The event further damaged confidence in subprime securitization markets.
BNP Paribas halted withdrawals from three investment funds, citing an inability to value their U.S. mortgage-related holdings. The announcement is widely treated as a turning point that exposed how quickly liquidity could vanish when securitized assets could not be priced reliably. It helped push banks and investors away from lending against structured products tied to subprime mortgages.
The SEC charged two former Bear Stearns hedge fund managers with fraud for misleading investors about the funds’ exposure and performance. The case illustrated how reported subprime exposure could differ sharply from total risk once indirect exposures through CDOs and related positions were included. It also reflected the growing regulatory focus on disclosure and valuation practices in structured credit products.
Lehman Brothers filed for Chapter 11 bankruptcy, triggering credit default swap (CDS) contracts referencing the firm. The default raised urgent questions about how much protection sellers would owe and how contracts would settle in a stressed market. It became a test case for auction-based settlement and for managing disputes and operational risk in the CDS market.
The Federal Reserve authorized an emergency lending facility to prevent AIG’s disorderly failure after the firm’s condition deteriorated rapidly. A central problem was AIG’s large CDS exposure on mortgage-related products, where collateral demands could rise sharply when market values fell and credit concerns increased. The rescue reflected how CDS-linked liquidity needs could transmit stress from failing CDO valuations into a systemically important insurer.
ISDA opened the 2008 Lehman CDS Protocol to standardize documentation changes so participants could use an auction to determine a final price for Lehman obligations. The protocol aimed to reduce disputes and streamline settlement across many counterparties in an over-the-counter market. It was a direct response to fears that inconsistent contract terms could amplify systemic stress.
An ISDA-administered auction set a final price of 8.625 cents on the dollar for Lehman debt for CDS cash settlement purposes. This implied that protection sellers would pay roughly 91.375 cents per dollar of notional to protection buyers. The auction demonstrated a market-based way to settle CDS after a major default, even amid extreme uncertainty.
Citigroup announced it would wind down its structured investment vehicles (SIVs) by acquiring remaining assets at fair value. SIVs had relied on short-term funding to hold longer-term securitized assets, and the crisis exposed that model’s vulnerability when liquidity disappeared. Citi’s move illustrated how off-balance-sheet securitization-related structures were being pulled back into banks as markets for structured assets broke down.
The Federal Reserve announced the Term Asset-Backed Securities Loan Facility (TALF) to support renewed issuance of certain AAA-rated asset-backed securities. While TALF focused on consumer and small-business ABS rather than subprime RMBS, it addressed a key crisis mechanism: the collapse of market funding for securitized products. The program showed how public liquidity backstops were used to restart parts of the securitization pipeline after private demand failed.
TALF started operating in March 2009, providing non-recourse loans against eligible high-quality ABS to encourage new issuance and improve liquidity. The start of lending marked a shift from emergency responses to more structured programs aimed at reopening securitization markets. It also reflected a policy lesson from 2007–2008: when securitization stops, credit to households and businesses can shrink quickly.
The ISDA “Big Bang” changes took effect, creating Credit Derivatives Determinations Committees and expanding auction settlement as a standard approach. These reforms were designed to reduce uncertainty and disputes over whether a “credit event” occurred and how CDS should be settled. Coming after the 2007–2009 turmoil, the changes aimed to make CDS settlement more predictable when reference entities default.
Collapse of subprime mortgage securitization: CDO failures and CDS disputes (2007–2009)