August 14, 2007 (LPAC)--The failure of Coventree of Canada to sell over $700 million in asset-backed commercial paper (ABCP) does not end there.

ABCP, which has been around for over a decade, is a creation of commercial and investment banks which are called "originators" who sell them to a "special purpose corporation" or "Structured Investment Vehicle" called a "conduit" with the purpose of transferring the debt off their books. This enables the banks to take advantage of raising cheaper credit in the capital markets, but despite the complexity of setting up this system, at the end of the day the "originator" is ultimately responsible for underwriting that credit.

Coventree is in reality only one such "special purpose vehicle" a conduit of other institutions, and among the banks that are listed on their website as "dealer partners" are some of the world's major banks: including BNP Paribas, CIBC World Markets, HSBC Bank Canada, Deutsche Bank Securities, National Bank Financial, and Laurentian Bank of Canada BNP. Among these are also those that previously announced significant losses in the sub-prime linked mortgage backed securities market. This week's Barron's, a major U.S. based financial publication, compares the subprime mortgage crisis and the looming ABCP crisis with the famous Penn Central bankruptcy. "The subprime mess also recalls another crisis. The virtual collapse of the commercial paper market in the wake of the Penn Central bankruptcy of 1970. Back then, the paper market consisted of relatively simple short-term corporate IOUs. Now, so-called asset backed commercial paper is backed by all manner of things, from credit cards and auto loans to collateralized debt obligations and comprises over half the commercial paper outstanding. Moreover, notes MacroMavens' Stephanie Pomboy, money-market funds own 27% of commercial paper outstanding.