Knowledge Center Article

Knowledge Center Article

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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.

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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 a lot more assets on their balance sheets." So, the author goes on with the statement with a conclusion that there will be more capital to meet regulatory reserve requirements. So, banks and near banks may be compelled to run their special-purpose entities and conduct programs and the terms for both loans and asset-backed commercial paper would be tight. In addition, without the liquidity guarantees put in bank-sponsored conduits, many companies could lose their access to the asset-based market. The author later mentions the good and bad about securitization. The good thing about securitization is that it has opened the door for extension of credit to more people and businesses in the United States. However, the securitization could be a bad ting when financial-reporting practices couldn't keep up with the innovation because the programs are from and used in SPEs off-balance sheet, investors don't have the knowledge about the risks that are in their activities. The author uses an example of abusing commercial paper. The example was that General Electric of using off-balance activities to manipulate is reported earnings.
I decided to do the project about commercial paper because I wanted to know how it's used. I learn that the purpose of using commercial paper is to help companies and receive money on commercial paper. However, it is very difficult to sell or buy commercial paper, because of the risks a person has to take in selling or buying commercial paper. Secondly, all my articles explain different kinds of commercial paper. However, they both explain their opinion on the topic with good effort. The big relationship I saw was that some people are against or just notice the bad news with commercial paper. For example, in the article "In Midst of Financial Storm Commercial Paper Strong" the author was stating the fall of commercial mortgage-backed securities. Also, in the article "Commercial Paper Chase" the author explains how banks can corrupt the system with special-purpose entities. Thirdly, I gained the knowledge that selling and buying commercial paper is very difficult. I believe there is too much risk in purchasing commercial paper. I found that many companies could do what Enron did and get away with it by hiding behind commercial paper. I learned the market for asset-backed commercial paper has increased in terms of size. I finally notice that the hotels and hospitals market had decreased in time. Finally, I don't have a legal opinion or experience commercial paper. Maybe in time I would but right now I can't even see commercial paper in my life.
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