down ABS subprime exposure
Investor in Tibet
effectively holds 90% of all issued subprime ABS
Investment banks after a long and exhaustive search
have discovered the beneficial owner of the majority of the US
subprime exposure. This exposure has been distributed through a large number of vehicles mainly relating to the securitisation
process. Many of them have been used to create CDOs (Collaterialised Debt Obligation). These are pieces of mathematical genius
whereby banks and rating agencies can turn up to 85% of a portfolio of BBB subprime mortgages into AAA securities. These can
be held by risk adverse investors. The exposure to subprime is further spread by the use of conduits and SIVs (special investment
vehicles). The former have often been set up by banks as off balance sheet vehicles that investment in subpirme mortgages.
The investments are often financed by the issuance of short term bonds (called commercial paper). The terms of these vary
and are complex, but generally lead to some exposure for the owner of the commercial paper issued by the conduit to subprime.
These are often purchased by money market funds as they are deemed high quality. All these financial instruments had led the
market to believe that exposure to subprime was widely dissipated and led to much speculation as to where the eventual exposures
Now after extensive investigations analysts at
top investment banks have arrived at a stunning conclusion. Through a series of money market fund investments, bizarre cross
holding, Canadian conduits, German banks and inadvertent and unwitting use of leverage the vast majority of the subprime mortgages
are owned by one investor in Tibet. The
investor was said to be surprised by the revelation when it was revealed to him. If the default rates continue to rise on
subprime mortgages the investor could end up owning substantial chunks of the United
States. This is rather surprising when one considers that the investor’s net worth
is currently $1.25.
Some are pointing to this as a wonder of modern
capitalism, that one poor man could own so much. Others are pointing to it as the death toll of the current credit market.
The investor is said to be consulting his religious advisers to help him get through this stressful period.