Another Day In Hell For The Abx Index

[Goldfinger]

I have to go with ?...! on this one. I can't see total financial and social collapse being a likely outcome.

Of course not. Take the Great Depression or Weimar. It was never a total collapse. Socially, people helped each other and were orderly queueing at the soup kitchens. Financially, many indviduals prospered since they were in hard assets (Weimar) or cash (Great Depression). So, I agree, there won't be a TOTAL collapse. But there will be a major collapse that will wipe out most people.

[Wad]

Of course not. Take the Great Depression or Weimar. It was never a total collapse. Socially, people helped each other and were orderly queueing at the soup kitchens. Financially, many indviduals prospered since they were in hard assets (Weimar) or cash (Great Depression). So, I agree, there won't be a TOTAL collapse. But there will be a major collapse that will wipe out most people.

Is it just me, but I always find Goldfinger's posts .... erm... ever so slightly frightening. Cannot quite square the avatar image of Gert Frobe in Chitty Chitty Bang Bang with Goldfinger's terrifying foresights into global financial armagedon.

[ockham]

I am saying "The Federal Reserve did lend money to banks using mortgage backed securities as collateral, and valued the collateral using a moving average" (please note the past tense).

Which part is gibberish?

I was just applauding the efforts of the people involved in averting a rapid unwinding of these vast positions, as such an event would have caused massive economic disruptions on the ground in the real economy.

If the big US investment banks were forced to shed other assets to cover their obligations to the creditors of their asset backed losses, we would have seen a much higher level of contagion.

This should provide the answer to some of your questions...

http://www.voxeu.com/index.php?q=node/460

Thanks I understand what a repo is. Where in that article does it say the Fed valued MBS collateral using a moving average? Where did you acquire the belief that the Fed values MBS using moving averages?

[?...!]

Thanks I understand what a repo is. Where in that article does it say the Fed valued MBS collateral using a moving average? Where did you acquire the belief that the Fed values MBS using moving averages?

Look, the closest I can come to referencing any record of it in the public domain is this

http://www.frbdiscountwindow.org/discountm...21&dtlID=83

check out the pdf link.

The tittle of column 3 "if market price not available" and the second table (changes and effective dates).

Sorry I cannot provide evidence for any actual operations.

[ockham]

Look, the closest I can come to referencing any record of it in the public domain is this

http://www.frbdiscountwindow.org/discountm...21&dtlID=83

check out the pdf link.

The tittle of column 3 "if market price not available" and the second table (changes and effective dates).

Sorry I cannot provide evidence for any actual operations.

Yes, this is a table showing the 'haircut' that the Fed takes on collateral. Mostly there will be market values for such securities. When there are not, note the steep haircut when there are no market values. You seem to have stood this thing on its head. If there were any suspicion there wasn't a real price for these, the central bank would not touch them.

Perhaps you are completely mistaken, as well as talking gibberish?

[OnlyMe]

17 new all time lows.

29-Oct-07 Overview

Index Series Version Coupon RED ID Price High Low

ABX-HE-AAA 07-2 7 2 76 0A08AHAD4 83.44 99.33 83.44

ABX-HE-AA 07-2 7 2 192 0A08AGAD6 53.50 97.00 53.50

ABX-HE-A 07-2 7 2 369 0A08AFAD8 34.06 81.94 34.06

ABX-HE-BBB 07-2 7 2 500 0A08AIAD2 21.50 56.61 21.50

ABX-HE-BBB- 07-2 7 2 500 0A08AOAD9 20.31 50.33 20.18

ABX-HE-AAA 07-1 7 1 9 0A08AHAC6 80.25 100.09 80.25

ABX-HE-AA 07-1 7 1 15 0A08AGAC8 48.56 100.09 48.56

ABX-HE-A 07-1 7 1 64 0A08AFAC0 27.34 100.01 27.34

ABX-HE-BBB 07-1 7 1 224 0A08AIAC4 18.78 98.35 18.78

ABX-HE-BBB- 07-1 7 1 389 0A08AOAC1 17.94 97.47 17.94

ABX-HE-AAA 06-2 6 2 11 0A08AHAB8 88.25 100.12 88.25

ABX-HE-AA 06-2 6 2 17 0A08AGAB0 66.11 100.12 66.11

ABX-HE-A 06-2 6 2 44 0A08AFAB2 40.41 100.12 40.41

ABX-HE-BBB 06-2 6 2 133 0A08AIAB6 21.94 100.59 21.94

ABX-HE-BBB- 06-2 6 2 242 0A08AOAB3 20.66 100.94 20.66

ABX-HE-AAA 06-1 6 1 18 0A08AHAA1 97.00 100.38 94.97

ABX-HE-AA 06-1 6 1 32 0A08AGAA9 86.88 100.73 84.64

ABX-HE-A 06-1 6 1 54 0A08AFAA7 65.67 100.51 65.67

ABX-HE-BBB 06-1 6 1 154 0A08AIAA4 43.16 101.20 43.16

ABX-HE-BBB- 06-1 6 1 267 0A08AOAA2 34.34 102.19 34.34

[lufc]

For all the off balance sheet accounting, creation of dodgy funds, central bank bailouts etc etc ... surely this can't go on for much longer ... Uncle Sam is playing his last hand at the moment and if it fails woe betide.

[FreeTrader]

Martin Hutchinson has a pretty apocalyptic piece out today:

Level 3 Decimation?

The capital underlying Wall Street, at the top, is not all that large – a matter of a few hundred billion. Given the piling of risk upon risk that has been engaged in over the last few years, and the size of the losses in the mortgage market alone that seem probable – my own estimate last spring of $980 billion looks increasingly likely to be somewhat below the final figure – it appears almost inevitable that in a bear market in which liquidity dries up and investors become skeptical, Wall Street’s capital will be wiped out. Only the commercial banks like Wachovia and Bank of America whose investment banking ambitions have been largely thwarted and portfolios of Level 3 rubbish are correspondingly lower are less likely to disappear.

Although it wouldn't surprise me if losses turn out to be as high as Hutchinson is estimating, I find it very hard to accept his conclusions. One way or another the establishment will paper over the losses just as they did in Japan, even if it leads to the same hamstrung credit markets and protracted slump.

[lufc]

Martin Hutchinson has a pretty apocalyptic piece out today:

Level 3 Decimation?

Although it wouldn't surprise me if losses turn out to be as high as Hutchinson is estimating, I find it very hard to accept his conclusions. One way or another the establishment will paper over the losses just as they did in Japan, even if it leads to the same hamstrung credit markets and protracted slump.

IMHO this is a very different scenario to Japan, this is the world's reserve currency we're talking about ... $'s creditors might want to call in some auditors of their own ... if you know what I mean

[ockham]

Even AA and AAA begininng to join in this time. New lows being made almost right across the board.

http://www.markit.com/information/affiliations/abx

Figures for 29 October out this morning. All but two show new lows.

[BandWagon]

Figures for 29 October out this morning. All but two show new lows.

cgnao should add the ABX index to his credit derivatives meltdown thread, perhaps once he's managed to figure the difference between a credit default swap and an interest rate swap.

After all, ABX is a regularly used derivatives index.

[Goldfinger]

cgnao should add the ABX index to his credit derivatives meltdown thread, perhaps once he's managed to figure the difference between a credit default swap and an interest rate swap.

After all, ABX is a regularly used derivatives index.

He has an own thread on the recent ABX legdown that he predicted correctly.

[?...!]

He has an own thread on the recent ABX legdown that he predicted correctly.

Predictions are easy when using hindsight.

By the way, what are his predictions again?

Hyperinflation in the USA?

Hyperinflation for the euro?

Hyperinflation everywhere? Including Japan?

The financial system will collapse!

The gold price will rise inexorably (with everything else) to the point where the few people who own meaningful amounts are granted oligarch status?

We will all see sense and debate a return the beloved and trustworthy gold standard.

The value of the endeavours of the remaining 6,000,0000,000 people on earth will be insignificant when compared to the value of small quantities of gold.

Earths 6,000,000,000 population will bow down to the gold bugs and pass the gold system back onto the legislature books.

The most surprising thing about such predictions is that people lap it up!

[fluffy666]

The financial system will collapse!

The gold price will rise inexorably (with everything else) to the point where the few people who own meaningful amounts are granted oligarch status?

We will all see sense and debate a return the beloved and trustworthy gold standard.

The value of the endeavours of the remaining 6,000,0000,000 people on earth will be insignificant when compared to the value of small quantities of gold.

Earths 6,000,000,000 population will bow down to the gold bugs and pass the gold system back onto the legislature books.

And then a large metallic metorite will break up in Earth's atmosphere, raining several kilos of 10% gold alloy on everyone's back garden and causing immediate and massive devaluation of gold worldwide. The gold bugs will sob.

[HousePriceLottery]

17 new all time lows.

I'm surprised no one has commented on the staggering drop on the AAA rated stuff.... the index now predicts a 20% default rate on AAA rated bonds!!!

This is massive news!

[A.steve]

I'm surprised no one has commented on the staggering drop on the AAA rated stuff.... the index now predicts a 20% default rate on AAA rated bonds!!!

This is massive news!

I had noticed it, and considered it very significant... BUT (selfishly) I consider this of limited interest to myself as the ABX is US$ denominated.

What really matters to me is Sterling... since I do not live in (or expect ever to live in) the United States.

I would like to establish the extent to which this will devalue the US$ relative to Sterling... and on what time scale.

I've been pointed at markit.com - but I can only make sense of the ABX. Can anyone explain the other indices to me, or point me at indices which track bonds in Sterling and/or Euro markets?

[ockham]

I'm surprised no one has commented on the staggering drop on the AAA rated stuff.... the index now predicts a 20% default rate on AAA rated bonds!!!

This is massive news!

Not quite. A fall of an AAA bond from 100 to 80 means that the implied yield on the bond is now

5.5% / 80 = 6.875%

assuming a risk-free coupon of 5.5%. That means the 'spread' – the amount the bond is now paying over the risk-free rate is now

6.875% - 5.5% = 1.375%

That is in effect the compensation the investor is receiving for the probable loss due to default. Assume you will lose on default about 30% (i.e. you can sell the repossessed homes for 70% of the mortgage value, which is a big assumption). Then the probability of default x times the loss on default = the compensation you are getting from the spread i.e.

1.375% = x times 30%

From which you can calculate probability of default x as 4.6% approximately, not the huge amount you were talking about.

[?...!]

I've been pointed at markit.com - but I can only make sense of the ABX. Can anyone explain the other indices to me, or point me at indices which track bonds in Sterling and/or Euro markets?

The Itraxx offers a European credit index

It seems summaries are now quarterly rather than monthly.

http://www.markit.com/information/products...ly_summary.html

You can see the latest charts (Q3) Here

http://www.markit.com/information/products...summaryQ307.pdf

Or if you really like you can track interday movements here

http://www.markit.com/markit.jsp?jsppage=indices.jsp

.

[thecrashingisles]

This is massive news!

It's well worth reading this post: http://suddendebt.blogspot.com/2007/10/wha...-in-common.html

[A.steve]

The Itraxx offers a European credit index

You can see the latest charts (Q3) Here

Or if you really like you can track interday movements here

I was aware of Itraxx - but didn't understand the figures. What is the "credit index bps"? What is the relevance of the index names? Aren't the European bonds structured by ratings like the ABX? Don't we get tranches in Europe?

:-S Still confused... and - in any case - still most interested in Sterling bonds...

[bleakhouse]

I thought that triple AAA was investment grade, safe and absolutely wonderful to have in your pension fund as a totally invulnerable investment. If it is has lost more than 10pct of its original value that surely makes it a risky investment. My (and yours) pension fund will have to sell it, won't they? and the price the fund achieves will have to be used to mark to market any similar 'assets' that any bank or hedgie might have, albeit offshore, won't it?

But will this happen? It hasn't yet.

[A.steve]

I thought that triple AAA was investment grade, safe and absolutely wonderful to have in your pension fund as a totally invulnerable investment. If it is has lost more than 10pct of its original value that surely makes it a risky investment. My (and yours) pension fund will have to sell it, won't they? and the price the fund achieves will have to be used to mark to market any similar 'assets' that any bank or hedgie might have, albeit offshore, won't it?

But will this happen? It hasn't yet.

Pension funds, as I understand them, have some pretty oblique restrictions... at least in the UK. Do we have a pensions expert who can explain what investments legislation permits to be held in a pension in order to secure the favourable tax status that pensions have?

[HousePriceLottery]

From which you can calculate probability of default x as 4.6% approximately, not the huge amount you were talking about.

Ok so a 4.6% default rate on so called AAA rated bonds....?! Now I'm pretty sure you wouldn't ever have a default rate that high on AAA rated stuff so it's still big news.

And it's still a 20% loss for anyone trading on the ABX derivatives.

[ockham]

Ok so a 4.6% default rate on so called AAA rated bonds....?! Now I'm pretty sure you wouldn't ever have a default rate that high on AAA rated stuff so it's still big news.

And it's still a 20% loss for anyone trading on the ABX derivatives.

Oh yes, absolutely. The implied probability of default for true AAA is 0.00001%, or 1 in 10,000 years type of thing. This sort of collapse is completely unprecedented. I pointed this out to an expert in investment, and he laughed, saying 'they just didn't understand what kind of triple A they were buying'.

[A.steve]

Oh yes, absolutely. The implied probability of default for true AAA is 0.00001%, or 1 in 10,000 years type of thing. This sort of collapse is completely unprecedented. I pointed this out to an expert in investment, and he laughed, saying 'they just didn't understand what kind of triple A they were buying'.

I'd love to chat to your "expert in investment" - he sounds a great laugh... he has my sense of humour. :-)

The critical questions, however, if you are still in touch, are these:

* What kind of investor doesn't know what kind of AAA they are buying? Are they typically investors constrained by red-tape who are investing other people's money?

* To what extent can the ratings agency be held responsible for not explaining what kind of AAA rating they proposed?

Edited October 30, 2007 by A.steve