And some parts of the securitized loans were sold to off-balance-sheet entities in which long-term assets were funded by short-term borrowing with implicit or explicit liquidity guarantees provided by the banks.
Securitization markets essentially collapsed when banks became unwilling to increase their exposure to such risks during the crisis, when the liquidity guarantees were invoked, and when other lenders in securitization markets became unwilling to supply credit. Although the Federal Reserve’s lending actions during the crisis were innovative and to some degree unprecedented, they were based on sound legal and economic foundations.