The holders of asset- backed commercial paper are discovering that liquidity is to investing what location is to real estate — everything. Without it, you are dead in the water if you need to sell or put a value on your holdings.

With the ink barely dry on the Portus Alternative Asset Management Inc. fiasco, hapless investors have once again found themselves victims of the financial engineers who spun them a tale — and had it effectively verified by a rating agency — that they had built silk purses out of sows’ ears in the form of structured investment vehicles (SIVs) that offered high-yielding short-term secured notes known as asset-backed commercial paper.

Only this time, the investors were mostly accredited financial institutions and intermediaries rather than the unfortunate retail clients of mutual fund dealers. And this time, the consequences provoked a crisis of confidence that has gripped the financial marketplace as the major players (including the central bankers) struggle to find viable solutions to avert a liquidity crunch that will negatively affect or wipe out the value of their holdings.

Each day brings new details of problems, starting with the Montreal accord designed to allow major pension funds and other institutional investors to salvage their investments, National Bank of Canada’s bailout of its money market funds, the deferral of a proposed merger of credit union centrals, the announcements by corporations and organizations of liquidity problems, massive loans by the Bank of Canada to the Canadian banking system, lack of information about the securities and derivative transactions that back ABCP, the unique Canadian limitations on standby liquidity obligations, rating agency conflicts, lucrative fees payable to the sponsors of the SIVs and their service providers, and the like.

You have to wonder what the trickle-down effect has been or will be on mutual funds, segregated funds and pension funds in which the assets of so many retail investors are invested.

Apart from the bailout of some money market funds by sponsoring banks and a statement by one mutual fund group that it did not hold any ABCP, there has been silence from mutual funds, segregated funds and pension funds as to whether they are affected by the meltdown of the ABCP market.

Perhaps none of this paper is held in any of these funds? This is hard to believe, given the relentless drive for yield — particularly in income funds — but perhaps it is true. If so, investors need to know. If not, investors also need to know.

Assuming that ABCP is held in these funds, one has to ask how it is being valued. Part of the problem is that there is no information available that permits a meaningful valuation. Scores of accountants and others are working on this issue. And the lack of information points out another weakness in the ABCP market — the buyers did not insist on information being disclosed to them concerning the holdings of the SIVs or the details of their derivative transactions or the production of financial statements.

How prudent were the money managers who invested fund assets in ABCP? For funds that are sold and redeemed on a daily basis, this is a serious problem. These funds are basically demand deposits, and liquidity matters to them. Should continuing sales and redemptions be allowed?

Yet another weakness highlighted by the current situation is the lack of timely disclosure of portfolio holdings. The fund industry has successfully bamboozled regulators into not requiring timely disclosure and into eliminating the requirement to issue statements of changes in portfolio transactions. This has contributed to turning these investment funds into “dark pools” lacking in transparency and accountability.

And still another looming question is whether holdings of ABCP increase a fund’s exposure to derivative transactions in contravention of the fund’s investment restrictions.

The fund industry and its regulators have remained silent on these matters. They owe it to investors to address these issues. IE