I had this chart back in July:

CMBX-NA-AAA 3

Back then, the size and speed of deterioration was astonishing. Well, this is the same chart half a year later:

CMBX-NA-AAA 3

It’s all gone like water under the bridge, this market will never be the same…

But that’s not all. As the discussion here points out the current spreads do not warrant even the worst case scenario we the bears can imagine. The AAA tranche is protected up to 20% losses completely, which is only pretty much how high it can go in case of average recession.

So I think there is a different thing that is happening. The regular banks or mutual fonds do not ever have any exposure to credit-default swaps, this is a trade for those who don’t care what happens next, i.e. hedge funds. Hedge funds are highly levered and even a slight change in margin requirement can produce those violent changes. Remember, we are discussing for weeks how broker-dealers are reluctant to lend money to hedge funds – those are the money they borrow at daily TOMO auctions (btw, it was a small drain today).

Someone is living a very interesting life out there, not something we, ordinary people, can imagine🙂