News surfaced last week that the fraudulent receivables sale found in PNC Bank's Market Street Funding (see ASR 4/29/02) was actually linked to a much broader scam currently under federal investigation, which could cost the global investment banking community as much as $1 billion, according to several published reports.

The headlines affected a second round of concern for the ABCP market, as participants wondered how much of the phony trades were financed via conduits. Reportedly, last Wednesday ratings officials were bombarded with inquiries concerning the scam. The good news, according to Sam Pilcer of Moody's Investors Service, is that the exposure was limited, not exceeding $200 million. All exposures were fully supported transactions, which have already been funded out of the market.

"The deal, for various reasons, was not a typical one for ABCP conduits," Pilcer said, adding that most of the losses will be suffered by the banks on their balance sheets. "It was not a target deal for most people in the ABCP market."

Last week, four traders that ran a company called Allied Deals were arrested for allegedly running an intricate metals trading scam, whereby they borrowed money from banks - including PNC, JPMorgan, Fleet Bank, HypoVereinsbank, Dresdner Bank and others - to finance fake commodity trades, using complex international/cross boarder scenarios. According to published reports, the subsequent loans were used to make payments on the outstanding loans, a Ponzi-like scheme.

A tough time all around

Even without the market's inaugural case of fraud, volume of ABCP has been below the mark, with outstandings inching down $8.4 billion in April, thanks in part to uncertainty on the accounting end, sources said. With approximately $723 billion in outstandings, the proportion of asset-backed commercial paper making up the entire CP market declined slightly as well, to approximately 52.4% from just over 53% in March, according to the Federal Reserve.

"The accounting issue has clearly affected execution," Moody's Pilcer said. "People are stalling deals, pending resolution of [The Financial Accounting Standards Board]. It sounds like there's a lot of spirited discussion by the board as what's to be done."

Pilcer added that the leasing deals are being viewed as somewhat subject. Activity from the arbitrage conduits has also slowed.

In JPMorgan's quarterly review distributed last week, the researchers note that the decline in volume is the first notable one "since the inception of the ABCP market," attributing this also to reduced funding needs associated with the economic slowdown.

Meanwhile, in its May addition of The ABCP Paper Trail Fitch Ratings takes a look at WorldCom exposure in the market, concluding that the impact should be limited and will not directly affect CP noteholders.

"While several programs have exposure to WorldCom, the respective transactions contain triggers, which, once tripped, would result in certain remedial steps being taken," Fitch writes. "Moreover, to the extent such exposures exist, any risk of loss would be absorbed by the individual transaction's deal-specific credit enhancement and, if necessary, the conduits' programwide credit enhancement, mitigating any potential loss to CP noteholders."

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