Tag: abx

ABX: A blast from the past

I’m listening to the Goldman Sachs testimony and as they float around words like CDO’s and ABX, I thought I’d check on what the ABX prices currently are as per Markit.   If you recall, I actually wrote the code for CDS on ABX back when I was at Countrywide in 2006 and 2007.

Wow.

Factors Effective: 2010-04-26
27-Apr-10 Overview
Index Series Version Coupon RED ID Price High Low Factor
ABX.HE.PENAAA.07-2 7 2 76 0A08AWAD1 47.31 70.00 24.56 0.995918674
ABX.HE.AAA.07-2 7 2 76 0A08AHAD4 44.58 99.33 23.10 0.995918674
ABX.HE.AA.07-2 7 2 192 0A08AGAD6 5.32 97.00 3.75 0.842675865
ABX.HE.A.07-2 7 2 369 0A08AFAD8 4.63 81.94 2.97 0.383809843
ABX.HE.BBB.07-2 7 2 500 0A08AIAD2 3.58 56.61 2.89 0.15
ABX.HE.BBB-.07-2 7 2 500 0A08AOAD9 3.58 50.33 2.88 0.15
ABX.HE.PENAAA.07-1 7 1 9 0A08AWAC3 54.35 80.27 28.36 0.998941369
ABX.HE.AAA.07-1 7 1 9 0A08AHAC6 44.85 100.09 23.25 1
ABX.HE.AA.07-1 7 1 15 0A08AGAC8 5.13 100.09 2.86 0.827149338
ABX.HE.A.07-1 7 1 64 0A08AFAC0 3.77 100.01 2.33 0.432376793
ABX.HE.BBB.07-1 7 1 224 0A08AIAC4 3.68 98.35 2.19 0.15
ABX.HE.BBB-.07-1 7 1 389 0A08AOAC1 3.66 97.47 2.19 0.117129675
ABX.HE.PENAAA.06-2 6 2 11 0A08AWAB5 77.88 93.88 53.04 0.715876842
ABX.HE.AAA.06-2 6 2 11 0A08AHAB8 57.29 100.12 28.72 0.984457918
ABX.HE.AA.06-2 6 2 17 0A08AGAB0 14.83 100.12 6.94 0.92237709
ABX.HE.A.06-2 6 2 44 0A08AFAB2 5.20 100.12 3.42 0.431335167
ABX.HE.BBB.06-2 6 2 133 0A08AIAB6 6.78 100.59 2.29 0.111413346
ABX.HE.BBB-.06-2 6 2 242 0A08AOAB3 6.02 100.94 2.34 0.1
ABX.HE.PENAAA.06-1 6 1 18 0A08AWAA7 88.24 98.50 82.18 0.181987649
ABX.HE.AAA.06-1 6 1 18 0A08AHAA1 88.94 100.38 59.75 0.828696827
ABX.HE.AA.06-1 6 1 32 0A08AGAA9 45.83 100.73 15.90 0.972754188
ABX.HE.A.06-1 6 1 54 0A08AFAA7 14.79 100.51 7.50 0.826844803
ABX.HE.BBB.06-1 6 1 154 0A08AIAA4 4.98 101.20 3.95 0.424882857
ABX.HE.BBB-.06-1 6 1 267 0A08AOAA2 5.03 102.19 3.90 0.285366883

I realize this is somewhat cryptic, but take a look, say, at the price for ABX.HE.AAA.07-2. This was the AAA tranche of an ABS Index made up of Home Equity (HE) issued sometime around July of 2007. Do you see the price? 44.85. The price started at 100.0 at issue so for this particular Senior investment grade tranche, you’d have lost more than 50% of your money if you’d invested back in 2007.

Wow.

If you decided to take a little risk back then, you might have bought the Mezzanine branch, as the good ol’ boys at Goldman Sachs call it.    If you’d bought $100 worth, guess how much you’d have right about now?   $3.58.

If you think we’ve come even close to hitting housing bottom, I’ve got a bridge to sell you!

Programming Fashion Faux-Pas

We’re releasing a new version of our code today so the last week’s basically been a free-for-all as far as fixing bugs and implementing enhancements. I had to push some additional Swaption data onto TIBCO for Blackrock to consume. So I had the pleasure of modifying an interface I’ve never worked on before. So I come across this:

if (product instanceof Swap) {
    ...
} else if (product instanceof TotalReturnSwap) {
    ...
} else if (product instanceof CDSABSIndex) {
    ...
}

Dude, are you kidding me? You ever heard of an interface? I think that right there tells me whether or not the person who wrote this code is a seasoned developer with good refactoring skills. I should remember to use that as an interview question. Frankly I wouldn’t hire a guy who codes like that…. It shows a complete lack of programming fashion sense.

Work’s been keeping me quite busy lately, actually. We are finally going live with CDS on ABX next week and I’m pretty pleased since I did pretty much 95% of the development for that. I got to get very intimate with the various credit events that can occur and how they should be handled. Actually Calypso’s not quite up to par in how it models CDS on ABX, at least as far as accounting is concerned. For accounting to get what it wants, a separate transfer needs to be created for each individual credit event. So if MarkIT says on a given month that ABX.HE.BBB-.06-1 has got an interest shortfall of 59.2, an interest reimbursement of 12.5, and a fixed correction of 15.1, Calypso needs to generate 3 individual transfers. As of 8.0.3, Calypso doesn’t even handle corrections at all. (Maybe they fixed that in 9.0?) Of course, the individual transfers can and should be netted together, but each one should generate its own transfer type and, further downstream, its own posting.

Anyway, it was interesting making this enhancement and seeing it trickle all the way down to Peoplesoft.

On the Cutting Edge of Finance

So by now everybody’s read about the subprime mortgage meltdown, right? Well thankfully Countrywide doesn’t seem to be so affected, but I’ve been reading some interesting analysis by Gretchen Morgenson over at the New York Times. She’s way sharp and although I frankly don’t know enough about all this, I tend to agree with her prognosis. Let’s just say it’s going to be a bumpy ride for the next 3 or 4 years when it comes to Real Estate in the U.S.

The thing is, you had all these mortgage lenders pretty much lending trillions of dollars to just about anyone who’d walk into their office, qualified or not. This of course drove housing prices way up since you had flippers gobbling up houses like crazy. Demand went through the roof but supply remained a constant. So now these lenders all have tons of expected payments but they want to liquify their assets, so they securitize these loans into asset backed securities. Subprime loans magically become BBB and BBB- asset tranches. Investors start buying these up since they offer a pretty good return on investment. Hell, you’ve even got investors borrowing Yen, converting into dollars just so they can gobble up all these asset backed securities.

Fast forward to the present. The Fed’s had to raise its lending rate quite a bit to curb inflation. Inflation is a risk thanks to instability in the Middle East and the growing demand for oil, especially in China. Americans are consuming as much as ever, not saving anything. All of a sudden, however, a lot of these ARMs are resetting so homeowners who were 2 years ago paying 4.5% are all of a sudden paying 8%. In subprime land, it’s more like 7% to 12% or some such nonsense. All of a sudden, the mortgage payment goes from $2,000 a month, which was a stretch, to $3,500 or more. So all these homeowners start defaulting on their loans. The lenders in turn pass the bad news to investors who start seeing interest shortfalls on their BBBs and BBB-s. So these guys are pissed and selling the assets. In the meantime, Japan’s raising rates and there’s a lot of Americans owing a lot of Yen.

What a mess…

Anyway, I’ve totally rambled on, but what’s cool about all this as far as I’m concerned is that I’m currently implementing Credit Derivatives on Asset Backed Securities (CDS on ABS, for short) and my employer plans to go live on indices within a month. All this is so very a propos especially with the subprime mortgage meltdown. Basically lenders use credit derivatives to minimize their credit risk. If you’re a lender, you buy protection by paying a monthly premium to a third party in exchange for them to cover you if there’s a default on the loan.

Right now our focus is to finish the implementation of ABX indices as we’re going live with that early April. I’ve been spearheading the effort, making enhancements and especially interfacing with MarkIT data feeds. It’s cool because it’s still so new everyone is trying to figure out how these creatures work. I’m pulling XML data from MarkIT before it’s even completely ripe… I’m on the cutting edge of finance and lovin’ it!