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Friday, March 14, 2008
Posted by Roberto
8:36 PM 0 comments

THE SUB-PRIME CRISIS

The fickle finger of blame has shifted from the large household name rating agencies to a formerly obscure benchmark index called ABX. Without getting into the gritty details, here's the essential story: banks and other institutions holding sub-prime debt need to value them for accounting purposes on a "mark to market" basis, ostensibly the market value at the time. So how do you place a market value on obscure and often opaque debt? Well, the practice, particularly with big banks, has been to use the ABX benchmark.

ABX is maintained by a London-based company called Markit Group. ABX exists not for valuation purposes, but rather as something that speculators can bet on -- a way to gamble on sub-prime debt without actually owning any. ABX is based on pricing for just 20 specific bond deals. And there you have it: a market that is estimated in the trillions of dollars is being valued based on the prices of a very thin benchmark.

What we have here is a case of unintended consequences from unintended use. With so much money at stake, one would think it would be in the common interest to develop a robust, dependable benchmark index. Apparently, it was easier to press the already existing ABX index into double-duty, and the consequences speak for themselves. It's an object lesson for data publishers: just because your data may have multiple uses doesn't mean you should necessarily encourage them. As commercial databases become increasingly integral to the customers and industries we serve, we all take on more responsibility along with our enviable market positions.

You may be wondering who owns Markit Group. Well, in a little bit of parting irony, it turns out Markit is largely owned by a consortium of banks, including, well, Citigroup, Merrill Lynch, UBS, Morgan Stanley, JPMorgan Chase, among many others.

Article's Source:
InfoCommerce Group: The Deep Dangers of Double-Duty Data

The Markit Group:
Markit was founded in 2001 as the first independent source of credit derivative pricing. As a private company with privileged relationships with 16 shareholder banks, Markit has unparalleled access to a valuable dataset spanning credit, equities and the broader OTC derivative universe. Markit customers (close to 1,000) are investment banks, hedge funds, asset managers, central banks, regulators, rating agencies and insurance companies.
Markit, Benchmark Financial Data and Services