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. Origin

August 2008
Daniel O. Beltran
Laurie Pounder
Charles Thomas

Comments

[Jimmy Lathrop:]

Ten years ago, Russia announced it would stop paying its debt and the worst thing that happened was John Meriwether was out of a job. He was still so rich we could still buy and sell all of us on this board. I don't understand why its okay to drop bombs on foreign people but its considered bad taste to play "jingle mail" with our debt. Maybe its because some people would be out of some bookrunning fees if we didn't play fair. Whatever. Where else is Chindia going to put there money, in the Karachi exchange? C'mon.

2008 Aug 20 06:33 PM

[Lockstep In...:]

Everybody expects Russia to be unreliable after 65 years of disfunctional Communism. But they do not expect the richest nation in the world to "walk away" on their debt. Calm down and think.

2008 Aug 20 08:54 PM

[Jimmy Lathrop:]

Do I have to put "sarcasm" in big caps when I post from now on?

2008 Aug 20 09:46 PM