Comments on: Muniland “dumb money” http://blogs.reuters.com/muniland/2011/04/11/muniland-dumb-money/ Bridges, budgets, bonds Thu, 09 May 2013 14:47:19 +0000 hourly 1 http://wordpress.org/?v=3.4.2 By: Cate_Long http://blogs.reuters.com/muniland/2011/04/11/muniland-dumb-money/comment-page-1/#comment-11 Cate_Long Thu, 14 Apr 2011 03:16:15 +0000 http://blogs.reuters.com/muniland/?p=115#comment-11 Some investment banks took the CDS approach a step further. In 2006, a consortium of investment banks led by Goldman Sachs and Deutsche Bank launched the ABX Index, which created five indices that tracked the aggregate performance of a basket of 20 designated subprime RMBS securitizations. Borrowing from longstanding practice in commodities markets, investors could buy and sell contracts linked to the value of one of the ABX indices. Each contract consisted of a credit default swap agreement in which the parties could essentially wager on the rise or fall of the index value. According to a Goldman Sachs employee, the ABX Index “introduced a standardized tool that allow[ed] clients to quickly gain exposure to the asset class,” in this case subprime RMBS securities. An investor – or investment bank – taking a short position in an ABX contract was, in effect, placing a bet that the basket of subprime RMBS securities would lose value. Page 35 http://levin.senate.gov/newsroom/supporting/2011/PSI_WallStreetCrisis_041311.pdf Some investment banks took the CDS approach a step further. In 2006, a consortium of investment banks led by Goldman Sachs and Deutsche Bank launched the ABX Index, which created five indices that tracked the aggregate performance of a basket of 20 designated
subprime RMBS securitizations.

Borrowing from longstanding practice in commodities
markets, investors could buy and sell contracts linked to the value of one of the ABX indices. Each contract consisted of a credit default swap agreement in which the parties could essentially wager on the rise or fall of the index value.

According to a Goldman Sachs employee, the ABX Index “introduced a standardized tool that allow[ed] clients to quickly gain exposure to the asset class,” in this case subprime RMBS securities. An investor – or investment bank – taking a short position in an ABX contract was, in effect, placing a bet that the basket of subprime RMBS securities would lose value.

Page 35 http://levin.senate.gov/newsroom/support ing/2011/PSI_WallStreetCrisis_041311.pdf

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