Sunday, August 31, 2008

Bank for International Settlements: ABX overstate losses

Not something we didn't already know, but the story is out again:

Key Index May Overstate
Mortgage-Debt Problems
Study Sees Mismatch
Between ABX Prices,
Default Risk for Banks
September 1, 2008

FRANKFURT -- The prices of a key index that banks use to gauge their subprime-related losses have been damped partly by factors that have little to do with the risk that borrowers could default on mortgages, according to a Bank for International Settlements report that could add to growing concern about how markets measure the severity of mortgage-debt problems...

The Switzerland-based BIS, often called the central bankers' central bank, has few formal banking duties but is a hub for economic research and global policy makers. Its quarterly report studies a widely used measure of the subprime mortgage market called the ABX. Run by Markit Group Ltd., the ABX is an index that tracks the value of securities backed by subprime loans. Because such securities barely trade, the ABX gets direction from actively traded instruments that insure against default on the securities, called credit-default swaps. The ABX often is used as a proxy for the value of mortgage-backed securities.

Housing-market factors including the likelihood that borrowers could default on mortgages have contributed to sharp declines in the ABX since last summer. But the BIS report also says that "declining risk appetite and rising concerns about market illiquidity have provided a sizable contribution to the observed collapse in ABX prices."

We had the same story June 8:

And you had it here, in April a couple of months before it was picked up by the press.

Maybe now, people will start believing it. After all, haven't the monoline insurers rallied 400-500% off of their lows?

And if these bonds are so toxic, what are these stocks doing up?


Anonymous said...

The BIS report can be found here

Palmoni said...

Thanks for the link

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