Asset-backed securities (ABS)

ABS is an umbrella term for various types of short-term debt securities that are backed by longer-term, less liquid loans. (The term “securitization” refers to the creation and issuance of asset-backed securities.) ABS are typically issued by a special-purpose entity sponsored by an investment bank. The vehicle buys up a package of loans — often mortgage, credit card, or student loans — and finances the purchase by selling ABS to institutional investors. The income from the borrowers’ payments on the underlying loans is then passed on to the investors who hold the abs. One special type of ABS are the mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac, the federally sponsored housing-finance agencies; these are widely seen as “safe assets” implicitly guaranteed by the US government. Another special type, collateralized debt obligations (CDOs), which played a key role in sparking the 2008 crisis, were bundles of subprime mortgages packaged by investment banks in complex ways that supposedly reduced their risk of default.

Assets and liabilities