Next time you see anything about subprime "carnage" or references
to "high-risk loans", remember this. Fremont General has agreed to
sell $2.9
billion of subprime home loans at a net loss of $100 million. The agreement
is the second such deal that Freemont has made: in the first, it sold $4 billion
of subprime loans for a loss of $140 million.
In both cases, the loss is roughly 3.5%. Now I know that bond markets are risk-averse,
but in anybody’s book a loss of 3.5% is hardly the end of the world. In fact,
Fremont shares are up 25% in trading today, as investors realize that the company
does not, after all, risk being wiped out by the "subprime meltdown".
Note: These are real loans, going for real money – billions of dollars.
As such, they’re a much better indication of the health of the subprime market
than the ABX "index", which in fact does not reflect the price of
underlying securities at all, but is rather a traded contract and a volatility
super-magnet.