The fraud is believed by PNC to involve monies it used to back commercial paper issued by a special purpose vehicle (SPV) known as Market Street Funding. SVPs take ownership of loans and then issue securities, the income and capital of which are paid out of the proceeds of the loans.
PNC backed the SPV, provided it with a credit line and set aside funds to cover a substantial amount of the $50 million exposure.
While the bank has adequate reserve funds to cover the exposure the disclosure of this fraud is another blow to PNC. The discovery of a bookkeeping error in February forced it to subtract $35 million from its 2001 earnings, a month after it was told to restate its 2001 accounts by the US Federal Reserve.
Asset-backed commercial paper issuance has grown in recent months, while the stock of traditional unsecured commercial paper has not.
The paper’s appeal is the collateral – receivables that are pooled and used to pay investors. These can range from expected payments on loans to payments due for goods.