Saturday, March 29, 2008

"Derivative" pricing?

Last week, the plans for a index that tracked securitized auto loans was scrapped. Nobody wants their auto loans to be "marked-to-market" like home securitizations at the prices the ABX index reflects.

In the simplest measure, these indexes, which reflect prices, don't differentiate between good and bad paper. Imagine if real estate transactions were only based on the zillow price. You would have no need of an appraiser, or a real estate agent. Think of how you could then game that system!

But some mortgage paper is better than others, just like homes. But buyers of the good paper, get the marks that the indexes, say that the paper is worth. So the only buyers, are those that buy the good paper, from distressed sellers, who will unload it at these bad prices. Don't think that this system isn't being gamed either!

How is that for a liquid market?

Is it any wonder why they scrapped plans for a synthetic ABS index?

It would only help the shorts and the bears.

And they don't need the help!

No comments: