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August 20, 2008
Foreigners Don't Own That Much Subprime. Maybe.
Speaking of those damn foreigners -- you know, the ones who keep propping up Fannie/Freddie by buying their debt -- there is a new Federal Reserve study out seemingly showing that non-U.S. exposure to subprime is a little less than some of us expected.
In a hypothetical scenario with a 20 percent default rate on nonconforming mortgages and a 10 percent default rate on other types of underlying loans (with a 50 percent recovery rate for each), we predict that foreigners would ultimately lose $75 billion on their holdings of ABS backed by U.S. assets.
Oh, that doesn't sound too bad. But wait:
Then again, the mark-to-market losses stemming from a price markdown in all foreign-held ABS can be as much as six times larger using a 20 percent price markdown.
So, it's either $75-billion in foreign losses or a half-trillion -- which is reassuring, or not.
Source:
Foreign Exposure to Asset-Backed Securities of U.S. OriginAugust 2008
Daniel O. Beltran
Laurie Pounder
Charles Thomas
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