Foreign Exposure to U.S. Asset-Backed Securities



If this is the sort of stuff that floats your boat, then you need to read this full paper; the rest of you should just go about your business (It is a Friday Sunday!).

Here’s the Abstract:

The financial turmoil which began in August 2007 originated, in part, because investors reassessed the quality of the assets underlying many asset-backed securities (ABS), particularly U.S. mortgages. The prominence of European banks in the early stages of the turmoil created the perception that foreigners held an outsized share of risky U.S. securities and prompted questions of why Europeans were so exposed. This paper evaluates that perception by quantifying foreign exposure to ABS with U.S. underlying collateral.  Using the latest survey data on foreign portfolio holdings of U.S. securities, we find that the ultimate losses that foreigners could incur arising from U.S. underlying assets are small relative to most scale variables, although initial total mark-to-market losses are estimated to be significantly larger. Among other reasons for this difference between ultimate and initial losses, we demonstrate that the securitization chain can amplify mark-to-market price declines in the presence of uncertainty or illiquidity. Finally, we show that, relative to the size of the market, foreigners’ holdings of U.S. mortgage-backed securities do not appear to be elevated compared with their holdings of other U.S. assets.

Um, whatever you say. 

Hat tip Paul!

Foreign Exposure to Asset-Backed Securities of U.S. Origin
Board of Governors of the Federal Reserve System August 2008
International Finance Discussion Papers  Number 939

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What's been said:

Discussions found on the web:
  1. m3 commented on Aug 24

    “the ultimate losses that foreigners could incur arising from U.S. underlying assets are small..

    foreigners’ holdings of U.S. mortgage-backed securities do not appear to be elevated…”

    they’re kidding, right?

  2. Rich Shinnick commented on Aug 24

    Hey Barry,

    What is up with the rapid fire posting on a Sunday?

    The righteous indignance in the commentary should be given a little more time to build on a post before you post something else to get us even more upset!


    BR: Whoops — I’ll move this one to 3:30

    I forgot the other one was set to launch at noon

  3. Mike in NOLa commented on Aug 24

    Could it simply be that initial foreign losses looked bigger because their governments force them to be more honest than Thain, Fuld, etc.?

  4. JustinTheSkepic commented on Aug 24

    And to have Spanish real-estate, or Irish real-estate, backed mortgages is a plus??? lol

  5. NOah commented on Aug 24

    I will gladly pay you Tuesday for a hamburger today Barry!

  6. AGG commented on Aug 25

    Don’t you just love that word “EXPOSURE”? So nuanced; so polite. I had that kind of exposure once. I was flying a light aircraft and the engine quit. I glided to about 400 feet from 3000 attempting to restart while lining up for a road in the everglades. Thanks to the auxiliary electric fuel pump, the engine restarted. It was pucker factor all the way. There’s a lot of constipation going around these days. When things finally let go, there’s going to be a shit storm that won’t quit.

  7. David Merkel commented on Aug 25

    This is just European exposure (if correct) — not Asian, not Middle Eastern. We sold most of the toxic waste to yield hogs abroad, though some trickled into hedge funds, and ultimately to fund-of-funds and DB pension plans.

    I’m not sure that the data source they used was complete enough — it is very high level data.

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