Another Day In Hell For The Abx Index

[?...!]

Not quite sure what to make of this, !...?. In 1929 it also took 2 years for the stock markets to bottom. We're only 2 months or so into this credit crunch. Plenty of time to feed through to the 'real' economy. I agree that it is much better for the clever investors who can get out in time. For the non-investor, the effect will be the same: a huge recession, collapsing house prices, collapsing pension funds.

Sorry,GF.

The real economy has avoided the rapid implosive damage of the collapse of the ABX. Due to the skill and hard work of those involved.

The fall out (if you will) will continue to fall for sometime.

Those instruments could have been marked from 98c to 0.5c in one day, had they been allowed to. Instead the liquidity provided by central banks has allowed these instruments to parachute to the ground without impacting other markets.

Imagine if all the US investment banks had to offload all their derivatives in one day to pay for the ABX losses? The markets could not absorb the volumes, and prices would collapse. Spreading the sell-off over time allows markets to absorb an oversupply (whilst softening prices) without destroying prices, costing jobs and losing skills.

[thedebtisreal]

Its very impressive how the guys involved in this stuff have managed what is actually a very orderly unwinding of a market this size.

I'm still not sure we have absorbed the full impact of this though.

I have to agree though, that without central banking liquidity we could have reached this level in a few days. But the losses are still there and no one is really uncovering them yet.

[DabHand]

I just dont understand who bought this stuff on the way down to provide this parachute unwind.

[?...!]

I'm still not sure we have absorbed the full impact of this though.

I have to agree though, that without central banking liquidity we could have reached this level in a few days. But the losses are still there and no one is really uncovering them yet.

I agree, we are yet to see the full extent.

But it is a fast moving (rapid) collapse of the ABX that would be the most contageous.

A slow collapse allows the large investment houses to avoid selling other assets to cover the losses.

The central bank has protected the other markets from massive selling by providing the investment houses involved in the ABX a liquidity bridge to meet their creditors.

The investment houses must still incurr the losses which will run to <10c on the $ for much of the ABX index.

[?...!]

I just dont understand who bought this stuff on the way down to provide this parachute unwind.

I will let you into a little secret...

Much of the stuff is marked to model on a large Moving Day Average (180-250MDA).

This is one way to avoid the rapid equity collapse that costs skills in the real economy.

It is a well managed collapse in co-ordination with the Fed.

[House of Lords]

I will let you into a little secret...

Much of the stuff is marked to model on a large Moving Day Average (180-250MDA).

This is one way to avoid the rapid equity collapse that costs skills in the real economy.

It is a well managed collapse in co-ordination with the Fed.

So in practical terms what are you saying? We'll just get continued dribs and drabs of losses, nothing world-shattering, and then magically in a year or two it will all spring back to life and these indexes will go straight back up again like nothing ever happened?

[ockham]

I will let you into a little secret...

Much of the stuff is marked to model on a large Moving Day Average (180-250MDA).

This is one way to avoid the rapid equity collapse that costs skills in the real economy.

It is a well managed collapse in co-ordination with the Fed.

Where are you getting this from? Where does it say that a moving average is used to caculate the ABX indices? How is it being managed with the Fed, exactly?

[?...!]

Where are you getting this from? Where does it say that a moving average is used to caculate the ABX indices? How is it being managed with the Fed, exactly?

The ABX isn't a MDA but the valuations against which the Fed secured the increased levels of liquidity was based on a long MDA. Christ the length of the MDA was even an argument for a lower risk premium!

Edited October 26, 2007 by ?...!

[OnlyMe]

Recent AAA got ******ing hammered today.

The only reason some of the lower rated stuff didn't get hit so bad is that there is hardly any worth left.

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

26-Oct-07 Overview

Index Series Version Coupon RED ID Price High Low

ABX-HE-AAA 07-2 7 2 76 0A08AHAD4 86.25 99.33 86.25

ABX-HE-AA 07-2 7 2 192 0A08AGAD6 58.07 97.00 58.07

ABX-HE-A 07-2 7 2 369 0A08AFAD8 35.86 81.94 35.86

ABX-HE-BBB 07-2 7 2 500 0A08AIAD2 23.14 56.61 23.14

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

ABX-HE-AAA 07-1 7 1 9 0A08AHAC6 83.39 100.09 83.39

ABX-HE-AA 07-1 7 1 15 0A08AGAC8 52.04 100.09 52.04

ABX-HE-A 07-1 7 1 64 0A08AFAC0 28.29 100.01 28.29

ABX-HE-BBB 07-1 7 1 224 0A08AIAC4 18.96 98.35 18.96

ABX-HE-BBB- 07-1 7 1 389 0A08AOAC1 18.57 97.47 18.57

ABX-HE-AAA 06-2 6 2 11 0A08AHAB8 89.89 100.12 89.89

ABX-HE-AA 06-2 6 2 17 0A08AGAB0 70.68 100.12 70.68

ABX-HE-A 06-2 6 2 44 0A08AFAB2 42.39 100.12 42.39

ABX-HE-BBB 06-2 6 2 133 0A08AIAB6 23.89 100.59 23.89

ABX-HE-BBB- 06-2 6 2 242 0A08AOAB3 21.96 100.94 21.96

ABX-HE-AAA 06-1 6 1 18 0A08AHAA1 96.93 100.38 94.97

ABX-HE-AA 06-1 6 1 32 0A08AGAA9 88.75 100.73 84.64

ABX-HE-A 06-1 6 1 54 0A08AFAA7 69.29 100.51 69.22

ABX-HE-BBB 06-1 6 1 154 0A08AIAA4 44.43 101.20 44.43

ABX-HE-BBB- 06-1 6 1 267 0A08AOAA2 35.46 102.19 35.46

[lufc]

I agree, we are yet to see the full extent.

But it is a fast moving (rapid) collapse of the ABX that would be the most contageous.

A slow collapse allows the large investment houses to avoid selling other assets to cover the losses.

The central bank has protected the other markets from massive selling by providing the investment houses involved in the ABX a liquidity bridge to meet their creditors.

The investment houses must still incurr the losses which will run to <10c on the $ for much of the ABX index.

Nice and orderly ... but still doomed ... gotta pay the piper someday.

[ockham]

the valuations against which the Fed secured the increased levels of liquidity was based on a long MDA.

Where are you getting this from?

[?...!]

Where are you getting this from?

Well I'm not about to implicate anyone.

Relatively long MDA on mortgage backed securities, was the basis for much the collateral for the recent discount lending in the States.

Its was a rather simple strategy to buy time and allow the investment houses to coordinate a gradual release of capital from other assets on a time scale the markets could absorb.

The whole point of the 'rescue' was to prevent a rapid and uncontrolled unwinding, which if allowed to unfold would be almost impossible to stop. Using a long moving day average on an asset class that has just collapsed as collateral on loans of this size would be regarded as madness, however the end of day prices simply precluded any efforts by the Fed to intervene. The Fed was forced to accommodate the risk since regulation does not allow unsecured lending on this scale.

Many would say this is an example of inventing equity and lending against it. Well maybe it was, but it was required to contain the issue. The method of pricing against a MDA is not uncommon and in no way illegal, but under those circumstances (immediate post collapse) it does raise eyebrows.

But any contention anybody may have over it, is purely down to their own opinion on what the market was going to do next (the fed could argue the MDA was used to reduce the effects of pricing blips, which is what this could have been).

In the end the banks will pay off their loans, the Fed will take interest on the loans, low grade MBS will collapse to almost worthless, the cost of credit will rise, but the real economy, the man on the street, will keep his job, will keep his skills.

Large losses are unwanted and very large losses are very unwanted, but rapid implosive losses are to be avoided at all costs.

[88Crash]

Jack's bond was not £100,000, as they hoped, but £85,714. The yield on Jack's bond would now be 7%.

And that will "put downward pressure" on house prices! I believe it is big big news which is why I have taken the time to try to spell it out.

Thanks for that simple explanation - makes it easy for a lay person like me to understand

[Bloo Loo]

In the end the banks will pay off their loans, the Fed will take interest on the loans, low grade MBS will collapse to almost worthless, the cost of credit will rise, but the real economy, the man on the street, will keep his job, will keep his skills.

Large losses are unwanted and very large losses are very unwanted, but rapid implosive losses are to be avoided at all costs.

Er, the banks only can payback the loans when they have profited from us.

As these losses are so large, this implies that banking costs to us are going to rise rapidly.

This means the cost of money is very likely to rise in the near future, implying, i beleive, mortgage rates and those to whom mortgages are granted are very likely to have an adverse effect on house prices here in the UK.

HPC seems inevitable, and faster than one mayhave first thought.

The cnsequences for the UK economy are dire.

maybe I should buy some silver

Edited October 27, 2007 by Bloo Loo

[?...!]

Er, the banks only can payback the loans when they have profited from us.

As these losses are so large, this implies that banking costs to us are going to rise rapidly.

This means the cost of money is very likely to rise in the near future, implying, i beleive, mortgage rates and those to whom mortgages are granted are very likely to have an adverse effect on house prices here in the UK.

HPC seems inevitable, and faster than one mayhave first thought.

The cnsequences for the UK economy are dire.

maybe I should buy some silver

I agree those things look almost certain now.

But we will have an economic contraction rather than the implosion this would have caused without the central banking system. Sorry to all those betting on social collapse.

The depth and longevity of the contraction is open to debate.

[Bloo Loo]

I agree those things look almost certain now.

But we will have an economic contraction rather than the implosion this would have caused without the central banking system. Sorry to all those betting on social collapse.

The depth and longevity of the contraction is open to debate.

my question now is, do I extend my rental for another 12 months to April 2009, or 6 months to November 2008 when its up for renewal?

IE buy place in end 2008 or mid 2009?

[Fishfinger]

I agree those things look almost certain now.

But we will have an economic contraction rather than the implosion this would have caused without the central banking system. Sorry to all those betting on social collapse.

The depth and longevity of the contraction is open to debate.

Thanks ?..!, your postings are a nice counter balance to the uberbears and doomsters on this site.

[ockham]

Well I'm not about to implicate anyone.

Relatively long MDA on mortgage backed securities, was the basis for much the collateral for the recent discount lending in the States.

Its was a rather simple strategy to buy time and allow the investment houses to coordinate a gradual release of capital from other assets on a time scale the markets could absorb.

The whole point of the 'rescue' was to prevent a rapid and uncontrolled unwinding, which if allowed to unfold would be almost impossible to stop. Using a long moving day average on an asset class that has just collapsed as collateral on loans of this size would be regarded as madness, however the end of day prices simply precluded any efforts by the Fed to intervene. The Fed was forced to accommodate the risk since regulation does not allow unsecured lending on this scale.

Many would say this is an example of inventing equity and lending against it. Well maybe it was, but it was required to contain the issue. The method of pricing against a MDA is not uncommon and in no way illegal, but under those circumstances (immediate post collapse) it does raise eyebrows.

But any contention anybody may have over it, is purely down to their own opinion on what the market was going to do next (the fed could argue the MDA was used to reduce the effects of pricing blips, which is what this could have been).

In the end the banks will pay off their loans, the Fed will take interest on the loans, low grade MBS will collapse to almost worthless, the cost of credit will rise, but the real economy, the man on the street, will keep his job, will keep his skills.

Large losses are unwanted and very large losses are very unwanted, but rapid implosive losses are to be avoided at all costs.

What on earth are you talking about? Sounds like gibberish. You're saying, in effect, that the Federal reserve is lending money to banks using mortgage backed securities as collateral, and is valuing the collaterall using a moving average?

[Bloo Loo]

What on earth are you talking about? Sounds like gibberish. You're saying, in effect, that the Federal reserve is lending money to banks using mortgage backed securities as collateral, and is valuing the collaterall using a moving average?

yeah, course he is.

cant have the valuations at realistic levels, that would cause a crash

[Bearback]

These figures look shocking to a layman like myself.

They look much worse than the Wall Street Crash.

[NoIdea]

What I want to know is who's left holding the baby?

[Goldfinger]

It is a well managed collapse in co-ordination with the Fed.

I don't think there is such a thing like a 'well-managed collapse'.

In the end the banks will pay off their loans, the Fed will take interest on the loans, low grade MBS will collapse to almost worthless, the cost of credit will rise, but the real economy, the man on the street, will keep his job, will keep his skills.

Large losses are unwanted and very large losses are very unwanted, but rapid implosive losses are to be avoided at all costs.

You sound as upbeat as all these guys after the 1929 crash (a new thread on this has just been established). I think you are dead wrong on this one, sorry. This will feed through, in a very, very bad way. And, heck, no, I don't think the banks will pay back all their loans.

What I want to know is who's left holding the baby?

Pension funds. But as ?...! points out, you don't have to worry, since you will only find out in many years that there is nothing in your pension.

Edited October 27, 2007 by Goldfinger

[Wad]

I am really pleased I bothered to read this thread. I normally have not taken that much notice of the detail of what is going on in credit markets except for the rising LIBOR rate and the very obvious credit crunch that is causing commercial paper markets to seize up.

However, correct me if I am wrong, what you guys all seem to be same is that there is a gigantic crash going on in a very significant part of the bond market but it has not hit the newstands yet so Mr Average Punter knows little or nothing about it yet. I conclude, that this crash in the bond market is now so severe that it cannot now be contained for much longer so that it will eventually (perhaps very soon) spill over into equities and property.

I conclude that I should go out and sell as much of my remaining equity portfolio as possible - preferably by Wednesday when the Fed rate cut is expected.

[DoctorJ]

my question now is, do I extend my rental for another 12 months to April 2009, or 6 months to November 2008 when its up for renewal?

IE buy place in end 2008 or mid 2009?

I'm planning on renting for at least 2 years- until end 2009. When this bubble is popped it will take a long time to deflate.

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

[?...!]

What on earth are you talking about? Sounds like gibberish. You're saying, in effect, that the Federal reserve is lending money to banks using mortgage backed securities as collateral, and is valuing the collaterall using a moving average?

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