ABCP (Asset Backed Commercial Paper)

ABCP is a package of debt — anything from mortgages, to car loans to credit card debt. Typically, ABCP is backed by a major bank and sold to others.  Banks generally agree to buy back the ABCP in the event no one else will.

According to the Financial Post:

A bank packages a collection of mortgages, credit card balances, or lines of credit into an ABCP that matures in 30 days. – The bank sells ABCP for a fee to an intermediary that assumes all the risk associated with the underlying assets. – The intermediary sells pieces of the ABCP to investors, including pension funds or corporations or individuals. – Investors are paid interest and assume there will be a buyer for their piece of the ABCP after 30 days. – For a fee, the bank supplies funds to buy the ABCP if there are no other buyers.

Note that, in Canada, this last feature did not work in August 2007 during the ABCP crisis.  Investors were therefore left without any buyers and the ABCP market crashed.

Before 2007, ABCP was quite popular.  A wide range of institutional investors bought it because it offered higher returns than other reasonably “safe” investments.