In late 2005 technical factors, including synthetic CDOs and ABX indices, kept credit derivative markets from signalling a warning about subprime risk.

Judged as of 2011-04-05. TRUE: credible analyses (FCIC report, academic studies, regulator or market research) show that subprime credit derivative spreads (single-name ABS CDS and the ABX, launched in January 2006) stayed tight or failed to widen in late 2005–2006 despite deteriorating fundamentals, and attribute this substantially to technical factors such as synthetic CDO demand for selling protection or ABX index dynamics. MOSTLY TRUE: the mechanism is supported, but the timing is somewhat off (for example mainly 2006 rather than late 2005), or the factors named are only part of the explanation that sources give. MIXED: spreads were tight, but sources disagree on or only weakly support the technical-factor explanation. MOSTLY FALSE: credit derivative markets did give meaningful warning signs in that period, or the causal attribution is unsupported and the claim rests only on a correlation. FALSE: evidence shows spreads widened clearly and early in late 2005 in response to subprime risk.

Set before the research began.

1. E1 Full text of Financial Crisis Inquiry Commission : Documents Relating to the Financial Crisis of 2007-2009 : Preliminary Staff Report : Credit Derivatives and Mortgage-Related Credit Derivatives FRASER, Federal Reserve Bank of St. Louis (hosting FCIC preliminary staff report) · 29 June 2010

   “As noted, short demand for mortgage-related assets was growing in 2005 and 2006; at the same time, demand for ABS CDO paper remained robust. As a result, synthetic and hybrid ABS CDOs provided a significant outlet for ABCDS and indices of ABCDS.”

2. E2 The Housing Market and Subprime Lending Board of Governors of the Federal Reserve System (Chairman Ben S. Bernanke) · 5 June 2007

   “Risk premiums on indexes of credit default swaps for subprime mortgage-backed securities (MBS) began to widen sharply late last year, especially for those on pools of mortgages originated in 2006.”

3. E3 The pricing of subprime mortgage risk in good times and bad: evidence from the ABX.HE indices Bank for International Settlements (BIS Working Paper No 279, Ingo Fender and Martin Scheicher) · March 2009

   “which started trading on 19 January 2006”

4. E4 Meeting of the Federal Open Market Committee March 20-21, 2007 Presentation Materials -- Text Version Federal Reserve Board, FOMC presentation materials (Appendix 1: Materials used by Mr. Dudley) · March 2007

   “The deterioration in the quality of subprime mortgage credit has led to a sharp widening in”

E1 says synthetic and hybrid ABS CDOs were a significant outlet for short demand on mortgage assets in 2005–2006. E2 dates the sharp spread widening to late 2006, and E3 shows the ABX started trading in January 2006. None of the evidence shows how subprime credit derivative spreads behaved in late 2005, or attributes their level to technical factors, so the claim cannot be placed under the criteria.