Everyone expected a lot of US sub-prime mortgages to go sour and everyone knew that leverage in the LBO market was getting ridiculously high. But the liquidity crisis that hit the ABCP market in August was something that almost no-one saw coming – and was greeted with panic and bafflement in equal measure. “We sat down early in the month and said ‘How far can this thing spread?’” reveals an ABS veteran. “We knew that the short-term money markets would be impacted, but it seemed that the entire ABCP investor base getting up and walking on 30-day paper was something that just could never happen.”
So why did it? There must be a pretty good reason for the markets to get to the stage that banks will not even lend overnight to each other. Many see the problems in ABCP (and structured investment vehicles) as the result of a chronic dearth of transparency. “When CP investors were trying to see what was in the conduits the information was so vague that they just panicked,” says an observer. “If you are simply told that the exposure to CDOs is X – but you are not able to find out what type of CDOs these are or what is backing them – then you will assume the worst and run.”
