|  | | 2012 News and Press Releases | | |
HEADLINE NEWS:
The Use Of ABX Derivatives In Credit Crisis Litigation
Professor Ethan Cohen-Cole and Dr. Faten Sabry
Mondaq. January 10, 2012
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EXCERPT: Since 2007, the losses and write-downs resulting from the credit crisis have reached over $2 trillion worldwide. 2 As the losses have mounted, securities litigation has followed and over 450 related securities cases, both class actions and others, have been filed. The litigation has covered a wide array of products ranging from mortgage loans to securities such as mortgage-backed securities (MBS), asset-backed securities (ABS), and structured finance collateralized debt obligations (CDOs), whose cash flows are backed by the principal and interest payments of loans. In addition, many disputes and regulatory investigations have centered on a particular type of CDO known as a synthetic CDO. A synthetic CDO "is the application of a CDS to a pool of reference credits. For example, the pool of reference credits could be tied to loans or to structured finance securities that reside on the sponsor's balance sheet (a synthetic balance-sheet transaction). Or the pool of reference credits could be tied to a defined group of corporations (typically an arbitrage transaction)." 3 Of particular interest to the litigation are a set of credit default swaps (CDS), or credit derivatives, known as the ABX indices (ABX). Plaintiffs have cited the ABX indices in a variety of credit crisis cases, where they allege that the ABX indices should have been used as market indicators to mark subprime-related securities including MBS and CDOs, to foresee additional losses on subprime investments, and to revise loan loss reserves. In addition, the ABX indices have been cited in various court decisions. In this article, we focus on the ABX indices, explain their economic functions, and explore how these indices are currently used in related litigation. |
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