4/15/2008: ABX, CMBX, any kind of X, out of control

Excerpts from Swaps Tied to Losses Became `Frankenstein's Monster'
By Neil Unmack and Sarah Mulholland

The latest version for AAA rated subprime mortgage bonds slumped by 43 percent since it began trading in August, according to Markit, as rising U.S. home loan delinquencies triggered a surge in the cost of credit-default swaps. That implies a 53 percent loss on the underlying mortgages, according to Schultz, almost four times the 13.75 percent rate predicted by Wachovia.

The cost to protect $10 million of AAA commercial mortgage securities jumped 10-fold during one six-month period to $100,000 a year, based on the first CMBX index from Markit. That implies about 13 percent losses on the underlying loans, more than four times the 2.8 percent forecast in the event of a recession by JPMorgan Chase & Co. analyst Alan Todd in New York.

"ABX, CMBX, any kind of X you like, are totally uncorrelated to any kind of underlying market," Swiss Re's Aigrain said at the Dubai conference.
...
"In a volatile market, this mark-to-market process becomes a self-fulfilling prophecy, driving prices down based on index trading activity rather than asset fundamentals," wrote Dottie Cunningham, chief executive officer of the New York-based CMSA.

Sabaziotatos says:

Remember these are the indices that the IMF used to estimate global losses from broad credit market deterioration of $945B, that Meredith Whitney used to estimate her latest round of losses for Citigroup, and that William Tanona used to make recent estimates for Citigroup.