Tuesday, October 23, 2007

Master Liquidity Enhancement Conduit

U.S. asset-backed commercial paper shrank for a 10th straight week last week, defying for now efforts by a group of America's biggest banks to shore up an important but ailing corner of the credit market.

The total asset-backed market has withered by as much as 25 percent from its record size in early August, and now stands at its smallest in 18 months, Federal Reserve data showed on Thursday.

Commercial paper is a vital source of short-term funding for daily operations at many companies, but its issuance largely ground to a halt as a crisis that began in risky mortgages led to a broader credit crunch.

The overall U.S. commercial paper sector did increase $1.3 billion to $1.866 trillion in the week ended Oct. 17. But asset-backed commercial paper, the hardest hit sector in the crisis because of its links to housing, fell $11.0 billion after a $6.8 billion decline the previous week.

"That's a dead market," said Howard Simons, strategist with Bianco Research in Chicago, of the housing-related subsectors of asset-backed commercial paper.

Such sentiment fed into recent worries that a massive fund organized by Bank of America Corp. (BAC.N: Quote, Profile, Research), Citigroup Inc. (C.N: Quote, Profile, Research) and JP Morgan Chase & Co. (JPM.N: Quote, Profile, Research) to rescue these tarnished assets may not work.

Many fear the so-called master liquidity enhancement conduit (M-LEC), which will buy securities from structured investment vehicles known as SIVs, will only target higher-rated paper, a fairly small chunk of the total.

Outstanding asset-backed commercial paper, often referred to as ABCP, diminished to $888.3 billion in the latest week from $899.3 billion the previous week.

Encouragingly, other areas showed expansion. Nonfinancial commercial paper showed its biggest increase in eight weeks.

"The figures as they stand would have been taken positively in the several weeks prior, but because of the announcement this week of the M-LEC and the decline in the asset backed category, the largest in three weeks, there will probably be more negativity expressed about today's figure than would have been deserved," said Tony Crescenzi, chief bond market strategist, Miller, Tabak & Co. in New York.

"There is a feeling there could be a new round of weakness in the asset-backed commercial paper market," said Crescenzi.

In early August a crisis erupted in credit markets that rocked the usually-sedate world of short-term lending, including commercial paper. Many money managers struck riskier ABCP off their list of approved securities in August, darkening the prospects for SIVs.

"The numbers tell the story," said Stephen Wesselkamper, a portfolio manager at Victory Capital Management in Cleveland, Ohio. "People are not willing to wade into these markets until there's more disclosure. In many cases we're funding assets that we really don't know what they are,"

Financial corporate commercial paper issuance rose $5.8 billion, after a $15.1 billion increase the week before.

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