Forgive a portion of the underlying debt

Fix the underlyings

Tim Bond, head of global asset allocation at Barclays Capital, pointed out in a research note on September 25 the size of the gap between present market prices for often synthetic securities derived from mortgage indices and derivative instruments and the underlying value in actual mortgages to real homeowners. “The ABX 07-2 CDS index currently implies a 45% total loss in the underlying mortgages. If we assume a recovery rate somewhere around 50%, the price is therefore suggesting that around 90% of the mortgages will default.”