New words of the day

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Reading the business section of the newspapers sure has gotten depressing these days. But for the sake of my financial enlightenment, I forge on.

The words of the day are: Asset-Backed Commercial Paper (ABCP).

It’s become a reflex to click on my Investopedia bookmark. Here’s what they had to say:

A company or group of companies looking to enhance liquidity may sell receivables to a bank or other conduit, which, in turn, will issue them to its investors as commercial paper. The commercial paper is backed by the expected cash inflows from the receivables. As the receivables are collected, the originators are expected to pass the funds to the bank or conduit, which then passes these funds on to the note holders.

YAWN. So what does this have to do with me and my safe little world of raindrops on roses and whiskers on kittens? More importantly, why is it getting so much ink? According to the Globe and Mail, it seems that the money I’ve been pouring into a money market fund during the recent volatility may not be so safe after all…

Many money market funds buy ABCP securities in an effort to boost returns along with government and corporate bond holdings. Recently, issuers of ABCP have been hurt by the recent credit crunch smackdown. Issuers are no longer as liquid as they used to be as lenders are leery in these uncertain times. Notes are maturing with no funds available to pay. Oops.

I’m not worried that my money market fund will be devalued by holding these shaky securities as it’s too soon to panic. Still, it’s good to know these things - you never know when it might come up in a crossword puzzle.

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