When Wall Street comes up with a good idea, they overdo it until the system chokes on the product they created. After the market failure, the system becomes more sophisticated and risks are priced better.
The ABX.HE indexes were created to have a uniform way of trading tranched subprime mortgage credit on a consistent basis. This would allow parties to go long or short, and in greater volume than the underlying cash market would support. They started with the 06-1 deal, which reflected subprime mortgage deals from 20 different originators from the second half of 2005. They have gotten as far as the 07-1 deal,which reflected subprime mortgage deals from the same 20 originators from the second half of 2006.
Well, now what? Many of those originators are gone, and most of the rest have scaled back massively. Will there be an 07-2 deal? In some ways, I wonder if the existence of the ABX.HE deals didn’t help to create part of the problem, in that the 20 originators had to come out with at least one deal of a certain size every six months. Being in the index would mean cheaper funding, so an originator would want to do that if possible.
I don’t see how the ABX.HE 07-2 gets done, and honestly, the system might be better off if it doesn’t get done. The existence of subprime mortgages encourages some people to take on onerous debt that they would be better off not incurring. Anything that encourages more subprime lending (and other high interest forms of debt) is in my opinion, a bad thing. Let people learn to defer their gratification, put more money down, and on the whole, they and the whole nation will be better off.