Your author describes an aspect of the 2007-2009 financial crisis concerning commercial paper and a financial instrument he refers to as an ABCP. Define an ABCP and the role it played in the financial crisis

Question

What will be an ideal response?

Answer 1

The ABCP, or asset backed commercial paper market, consists of commercial paper issued by "off-balance-sheet" affiliated firms of larger financial institutions. These instruments are under the control of but do not appear on the parent firm's balance sheet. Thus, they are more susceptible to riskier investment activities. In the early 200.s, financial institutions in an effort to boost returns invested these short-term sources of financing into longer term assets such as mortgage-backed securities. This maturity mismatch became a serious problem in the financial crisis as short-term financing dried up institutions were no longer able to fund their longer term assets. Bankers violated one of their own maxims of requiring firms to effectively match the maturity of sources with the maturity of uses of funds. As a result, firms lost trillions of dollars in long-term assets in part as a result of unsecured pursuit of higher returns.. AKA greed.