Wednesday, November 07, 2007


First, the ABX indices explained.

ABX.HE indexes track credit default swaps (CDS) on subprime mortgage-backed securities. CDS are derivatives that provide insurance against default. Mortgage-backed securities are home loans that have been packaged up together and sold as a single security.
The ABX.HE index that tracks CDS on the riskiest subprime loans, rated BBB-, that were sold in the second half of 2006 fell to 69.39 on Friday, according to, which administers the indexes. That's down from 72.71 on Thursday and 79.04 at the beginning of the week. In early February, this index was above 90.
Friday's price means that if investors wanted to buy protection against default on a notional $10 million of these loans, they would need to pay $3.061 million up front, plus a fixed 2.42% annual payment. This is a record low, and represents a spread of roughly 1,500 basis points.

Or, roughly speaking, if the index is at 70, there's a 30% of default. If the index is at 25, there's a 75% chance of default. etc...

All the supposedly "bad" stuff crashed awhile back, but today the "best" stuff crashed too, with a price reflecting about a 30% chance of default.