ABX Index Performance During 2008 Subprime Mortgage Crisis: Key Insights and Price Impact

Katrina Ávila Munichiello brings over fourteen years of expertise as an editor, writer, fact-checker, and proofreader across print and digital media.

The ABX index, developed by Markit Group Ltd., served as a synthetic benchmark designed to track the subprime mortgage market's health. It consists of multiple sub-indexes, each representing a "tranche" of 20 credit default swaps (CDOs) backed by subprime mortgage loans.

These tranches are categorized by credit ratings from AAA down to BBB-minus. Every six months, a new series is issued reflecting the largest current deals. A higher ABX index value signals lower risk in subprime mortgages.

Launched on January 16, 2006, just before the subprime lending collapse of 2007-2009, the ABX indexes trade based on the price of their underlying securities. Consequently, their performance mirrored the steep decline of credit default swaps during the financial crisis.

It’s important to note that the ABX index does not reflect the value of any single credit default swap.

Key Highlights

• Markit introduced the ABX Indices in 2006 to provide investors with exposure or hedging options for subprime residential mortgage-backed securities (RMBS).
• The ABX family is a synthetic, tradable index series.
• Each index references 20 subprime RMBS bonds or transactions meeting specific criteria.
• RMBS transactions include tranches grouped by credit ratings from AAA to BBB-minus.
• Sharp declines in the ABX indexes before 2008 signaled growing instability in financial and housing markets.

ABX Index as a Harbinger of the 2008 Financial Crisis

Analysts viewed the steep drops in the ABX indexes as early warning signs of the impending financial crisis. After a brief rally in spring 2007, the indexes plunged further. The AAA tranche, considered the most secure, fell over 30% between June 2007 and June 2008. Lower-rated tranches suffered even more severe losses, with the BBB-minus index dropping by more than 90% to below 10 by mid-2008.

Notable Fact

At the peak of the crisis, Washington Mutual, the largest bank failure in U.S. history with $307 billion in assets, collapsed and was taken over by the FDIC.

Subprime Mortgage Lawsuits and the ABX Index

In Citi’s 2008 annual report, the ABX index was cited as a critical factor in valuing collateralized debt obligations (CDOs), influencing $20.7 billion in net write-downs.

Post-crisis lawsuits highlighted the ABX index as a vital market barometer that should have alerted financial institutions to subprime market risks.

A class-action lawsuit against Morgan Stanley by the Boston Retirement System claimed that the bank’s $13.2 billion swap portfolio was closely tied to the ABX BBB index. Between May and August 2007, the index dropped 32.8%, yet Morgan Stanley only reported a $1.9 billion markdown instead of the $4.4 billion expected, allegedly masking the company’s true financial status.

Similarly, retirement funds sued UBS, alleging the bank shorted the ABX index starting in September 2006 while failing to disclose its position and the associated risks. UBS recorded a $10 billion write-down in December 2007 related to U.S. subprime mortgages.

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