Knowledge Center

This article the "Knowledge Center" states that the asset-backed commercial paper market is becoming large. The author says the asset-backed commercial paper is too big to ignore, also become for a challenge. First, the asset-backed commercial paper is growing in size by $145 billion five year to more than $700 billion. The reasons behind the increase in asset-backed commercial paper; for example, it has become traditional insurance. Commercial paper is an unsecured obligation of a company, without any assets supporting the company. If an issuer messes up on a commercial paper, that person becomes a somebody on the bottom of the food chain. However, in the past this wasn't a problem for commercial paper market because buyers purchased commercial paper only from highly rated issuers. So, the commercial paper usually matures before credit quality is found out and default becomes an issue. The money-market buyers are being hit with degeneration of their credit quality. The author states that these quick declines has made managers less willing to sell unsecured commercial paper to many companies. The portfolio managers view asset-backed commercial paper as an alternative. The paper that is issued by a bankruptcy remote is used to cancel the idea of default by the seller. Also, the assets that are involved with the purchase of commercial paper are making the deal become a lot safer. The last reason why asset-backed commercial paper is growing is the supply and demand of commercial paper. Because of a number of formerly top-rated companies having been lower, money market managers have less issuers in which to invest. So, asset-backed had this voiced making asset-backed commercial paper an attractive funding in the market place. Secondly, the asset-backed commercial paper had increased in complexity. A couple of years ago it was easy to sell and buy asset-backed commercial paper. In these times, the variety of assets that go into asset-backed commercial paper has become wider. For example, it was just credit cards and auto loans that backed by asset-backed commercial paper, now it's that plus synthetic leases, mortgages, and corporate securities, and collateralized debt obligations. The money market buyers don't have to worry about default that much because of the complexity of asset-backed commercial paper is that support for credit and liquidity had evolved. Credit support can cover a person's ability to purchase asset-backed commercial paper. Credit support is a little different. Liquidity support comes into effect if the trust is having trouble selling new paper. Finally, the article explains the future of asset-backed commercial paper. The author explains that asset-backed commercial paper has become popular to traditional forms of short-term investing. Also, the complexity has made asset-backed commercial paper have a track record. However, that means there will be a lot of effort must be done to understand its risks and benefits.

 The article is about how banks could be corrupt like the corporation Enron. The article explains the uses of special-purpose entities. The activities that are brought by special-purpose entities in the asset-backed securities market could not be similar to what Enron did in the past. However, special-purpose entities raise the same issues of disclosure and hidden risk. Also, one trillion dollars of assets were taken off corporate balance sheets into special-purpose entities and vehicles known as commercial paper conduits. The author explains that commercial banks will be the greatest concern of being corrupt because they use special-purpose entities to securitize their own assets and sponsor asset-backed commercial paper conduits which, which purchase and securitize assets from other parties. However new accounting rules for these activities will cost banks and their corporate borrowers. The author mentions Jeff Allen, a senior manager with Pricewater house Coopers, said "If they are forced to consolidate them there are going to be