With mortgage-backed paper, in contrast, you are making a lopsided bet.
Today the Treasury and the Federal Reserve are announcing a facility to finance the issuance of non-mortgage asset-backed paper in order to support lending to consumers and small businesses that is vital to our economy.
But perhaps the most worrying thing for financial institutions holding mortgage-backed paper is not the subprime market itself, but the unnerving parallels with an even bigger one to which they are also exposed: leveraged loans to companies.
By providing liquidity to issuers of consumer asset backed paper, the Federal Reserve facility will enable a broad range of institutions to step up their lending, enabling borrowers to have access to lower cost consumer finance and small business loans.
Turns out that the Primary Fund, like many other money market funds, made significant investments in asset-backed commercial paper (ABCP), which offered juicy yields, but did so because they were backed by things like mortgages, auto loans, credit card receivables and other risky assets that, despite their risk, came with investment-grade ratings.
The template is its September 19th announcement that it would finance banks' purchases of asset-backed commercial paper from money-market funds.
The hope is that investors will buy into this fund, and it will unfreeze the short-term asset-backed commercial paper market.
The Federal Reserve responded with several programs, including a facility to finance bank purchases of high-quality asset-backed commercial paper from money market mutual funds.
No. 12, "speculative areas beyond housing may suffer in 2007, " has commenced with the evaporation of the asset-backed commercial paper market last summer and the drying up of private equity financing.
For this reason, ad hoc responses will still be critical, such as last week's federal guarantees for money-market funds, Fed loans to banks to buy asset-backed commercial paper and, on Sunday, approval of the remaining two big independent investment banks, Morgan Stanley and Goldman Sachs, to become Fed-regulated bank holding-companies whose investment bank units can now borrow from the Fed on the same terms as other banks.
But then, in 1971, Richard Nixon replaced a more-or-less solid dollar, vaguely backed by gold, with a pure paper dollar, backed by nothing but the good intentions of government employees.
He has just introduced "emergency" legislation to give federal funds to any jurisdiction that changes to a paper-backed system by November.
For some banks, the combined issuance of asset-backed securities and commercial paper (short-dated securities) amounted to about half of all their loans.
The move to fiat money (paper not backed by gold) created the huge expansion in global money supply that the pessimists had predicted.
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Some were tempted by promises of land, others by the fact that the king's armies paid in a gold-backed currency, not paper dollars.
The facility will buy unsecured and asset-backed three-month commerical paper directly from eligible issuers.
The Fed will buy unsecured and asset-backed three-month commerical paper directly from eligible issuers.
Finally, its support of the financial system with massive asset purchases in frozen markets, including commercial paper, mortgage backed securities, and currently Treasury notes.
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But unlike bank loans, commercial paper is not backed by collateral.
Mr Cockburn said that some items which seem like ideal candidates for recycling, like wrapping paper or cards backed with foil or plastic, simply will not be accepted.
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The facility will buy unsecured and asset-backed three-month commerical paper directly from eligible issuers, and the Fed will lend funds to the vehicle at the the target Fed funds rate.
Dealers, such as Citigroup and Goldman Sachs, have backed away from soaking up unwanted paper.
Recreating its backstops for money-market funds, commercial paper and asset-backed securities might require such stringent conditions that no one would participate.
In America, capital markets matter more, so the Fed had to get its hands dirtier by buying commercial paper and mortgage-backed securities.
The Greek problem is also a euro problem, and the euro problem is a paper-money-backed-by-nothing problem coupled with high levels of debt.
Instead, the markets came up with the right reform: Such paper had to be backed by ironclad lines of credit from commercial banks.
One should not sloppily confuse fiat with paper or non-backed.
Known as conduits, these special-purpose vehicles borrow in the short-term, commercial-paper market to make acquisitions of highly rated paper in American asset-backed securities, and have been walloped by the plunging value of those assets since the frailty of subprime loans were exposed.
Your money used to be backed by real things like gold and commercial paper.
Even pieces of paper stuck to a wall were backed with aluminium foil.
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