ABCP -what's with that?
August 21, 2007
I learned last week that ABCP stands for Asset Based Commercial Paper - which means short term loans secured against assets like credit cards, car loans, and sub-prime mortgages. These are higher risk, and higher rates, so banks and third party lenders then use them as security for longer term loans somehow. I'm not sure how it's all related, but it turns out some of these assets are not as easy to grasp as they should be. In particular the sub-prime mortgages have been referred to as Ninja's - No verification of INcome, Job, or Assets. Verification used to be a big deal, but lately has been ignored more, as lenders sign up lots of new homeowners with brand new mortgages that they really don't qualify for. Many find they can now afford that new place since they have reduced (or zero) payments for the first year. And some are realizing a new house means you "need" more furniture, garden things, decorating, and that they still won't magically have the cash flow for the payments. For many it's a painful reality, recent figures from the US are of increased foreclosures - 180,000 last July -almost double the year before. And if the homeowners haven't realized it yet, the people being asked to "buy" these ABCP debts are realizing it, with significant impacts on the stock markets. Big in the news last week was of Toronto based Coventree- their shares tumbled 35 percent after the company extended (couldn't fund) maturities on C$250 million of ABCP and sought emergency funding for another C$700 million of debt. They have about C$16 billion of ABCP outstanding, so this was only a part of their total, but enough to worry investors. The stock market had been rising well the first six months of this year. so well in fact that there have been a lot of warnings that it is too good to be true- stocks are over-valued, investors are paying too much in a rush for potential profits. So people heard of this ABCP issue, and it's related reminder of the shakiness of the sub-prime market, a lot of people decided it was time to sell those riding stocks and take a profit. So many sold that the TSX and other indexes dropped a lot last Thursday. Various governments pumped in some cash to slow the slide and dropped rates slightly - which seemed to convince people that there really was a problem - more selling. With the previous slide in July, the TSX ended up dropping to the same level it had last January - effectively wiping out 6 month's gains. Advice seemed to be to not sell, to just sit tight, or grab some bargains. Lots of funds did that. I had a stock that had been rated last month as still worth buying into - so when it dropped a few dollars I just bought more. The drop has stopped, but it likely will take several months for the markets to recover. Apparantly subprime mortgages make up only 5% of the mortgage market here compared with 20% in the US - must be our conservative bent. This implies that any increase in subprime defaults here will have a more limited impact on the our economy. However - if the US subprime defaults depress their economy - this WILL have an effect on us.
This is all very fascinating to me. I've had some RRSP's for a while, some mutual funds via my corporation, but have just in the past year got into more mutual funds and stocks on my own. I talk to friends that invest, read the G&M Report on Business section (before the news section I admit), I now have their GLOBEInvestor Gold to track it all, and that lets me keep their Business News Network running live in the background. Great interviews, lots of tips - all of which sound good, so the challenge is to pick the ones that I think match my style, and that I believe will do well. A bit of a gamble, but I try to risk only as much as I would be OK to lose.
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