The two panicky statements above (The BBB- rated portions of ABX contracts are "going to zero" and "subprime carnage") are not mine. The "carnage" metaphor was used today by the usually sober and not panic-prone Wall Street Journal (and used interchangeably in recent days with the "meltdown" term by other mainstream media and analysts). While the former statement comes from the head of a securities brokerage cited today by Bloomberg: 

The BBB- rated portions of ABX contracts are ``going to zero,'' said Peter Schiff, president of Euro Pacific Capital, a securities brokerage in Darien, Connecticut. ``It's a self- perpetuating spiral, where as subprime companies tighten lending standards they create even more defaults'' by removing demand from the housing market and hurting home prices, he said.

Taken literally the statement above is an obvious and clear exaggeration as ABX prices are nowehere close to zero. But from a substantial point of view - and as a metaphor of that ABX market - the statement is actually correct as prices of ABX BBB- indices are literally in a free fall. At the current asymptotic rate of fall (see charts here) they could in principle reach zero in a short time. For example the price of the ABX-HE-BBB- 06-2 - that was trading close to par (100) between August and Nobember 2006 - is now down to 72.71. The price fall since November could  be well described by an exponential hyperbolic function (a "free fall of the cliff" in the layman's language of those who do not have a Ph.D. in finance). And at this rate of price fall of course - as argued by Mr. Schiff - prices are "going to zero".

But you do not need to reach zero to have an sub-prime "carnage" or "meltdown" (the latter term used - among many others - by the smart and still bullish Richard Berner of Morgan Stanley): even at the current price of 72 the cost of insuring against default on the riskiest tranches of subprime mortgages is already literally astronomic, having surged from the 50bps over Libor of a few weeks ago to the 1200bps plus (and rising by the hour) in recent days.  To cite Bloomberg:

Subprime Mortgage Derivatives Extend Drop on Moody's Reviews

By Jody Shenn and Shannon D. Harrington

Feb. 22 (Bloomberg) -- The perceived risk of owning low- rated subprime mortgage bonds rose to a record for a fifth day after Moody's Investors Service said it may cut the loan servicing ratings of five lenders.

An index of credit-default swaps linked to 20 securities rated BBB-, the lowest investment grade, and sold in the second half of 2006 today fell 5.6 percent to 74.2, according to Markit Group Ltd. It's down 24 percent since being introduced Jan. 18, meaning an investor would pay more than $1.12 million a year to protect $10 million of bonds against default, up from $389,000.

Moody's said late yesterday that it may cut the so-called servicer ratings for affiliates or units of lenders including Irvine, California-based New Century Financial Corp., the second- largest lender to subprime borrowers. Declines in the ABX-HE-BBB- 07-1 and similar indexes accelerated this month as New Century and HSBC Holdings PLC, the biggest lender, said more of their loans were going bad than they expected. London-based HSBC today said the head of its North American unit stepped down.

``I do not think it is surprising we have trouble in this sector of the market; I think the surprise is the speed at which it has unfolded in the last couple of months,'' said Mary Miller, director of fixed-income at Baltimore-based T. Rowe Price Group Inc., which manages about $335 billion in assets...

Moody's Review

``Protection-sellers largely have stepped away until the market settles down,'' Peter DiMartino, asset-backed securities strategist at RBS Greenwich Capital, wrote in a note to clients today. ``Recent mini-rallies were just a few brave souls hoping they could actually catch the falling knife.''

Moody's said it also may reduce servicer ratings of affiliates or units of Ameriquest Mortgage Co., Accredited Home Lenders Holdings Co., Winter Group and NovaStar Financial Inc., which this week reported a surprise fourth-quarter loss of $14.4 million. The ratings affect how much protection for mortgage bond investors ratings firms require. Potentially weaker servicing at the companies may hurt existing bonds, Moody's said...

The level of delinquencies and defaults on subprime mortgages made last year is the highest ever for such loans at a similar age, according to New York-based Bear Stearns Cos.

`Taken a Hit'

Concern about low-rated subprime mortgage bonds have caused yield premiums to rise on low-rated bonds of so-called collateralized debt obligations backed by the debt. Yields on typical BBB bonds from such CDOs widened 1 percentage point relative to benchmarks in the week ended Feb. 15 to 5.50 percentage points, according to JPMorgan Securities Inc.

``Liquidity has taken a hit as market participants wait for the dust to settle,'' Christopher Flanagan, an analyst at New York-based JPMorgan, wrote in a Feb. 20 report. CDOs buy loans, bonds and derivatives, and resell the cash flows in new bonds, some of which have higher credit ratings...

Low-rated subprime bond prices are getting to the point where Kirby said he may need to ``reassess'' whether the yields are high enough to cover the risks.

`Going to Zero'

New series of ABX indexes are created every six months by securities firms including Bear Stearns, and Goldman Sachs Group Inc., and London-based Markit. They indicate prices for default swaps linked to 20 bonds, not prices for swaps on each.

Besides bondholders, stock investors have used ABX contracts as a way to bet on the declining fortunes of subprime mortgage companies or the housing market.

The BBB- rated portions of ABX contracts are ``going to zero,'' said Peter Schiff, president of Euro Pacific Capital, a securities brokerage in Darien, Connecticut. ``It's a self- perpetuating spiral, where as subprime companies tighten lending standards they create even more defaults'' by removing demand from the housing market and hurting home prices, he said.

This ABX and sub-prime "carnage" is bad enough. However, the most interesting macro question is how this "carnage" will affect the credit crunch that is now hitting sub-prime mortgages and that is at risk of spilling over to other mortgages and to other credit spreads? Let us think in some detail about this most important question...(and those of you who are not RGE subscribers can watch my views on these issues in my recent interview on CNBC )

[Friday Morning Update: The first five "Breaking News" on Bloomberg.com this morning are:

• Stocks in U.S. Decline; Countrywide, Lehman Lead Financial Shares Lower

• Subprime-Mortgage Risk Climbs for a Fifth Straight Week, Derivatives Show

• Treasuries Rise to a Five-Week High as Investors Flee Subprime Mortgages

• ResMae's Collapse May Foreshadow Flurry of Subprime Lender Bankruptcies

• KB Home Is Focus of U.S. Criminal Probe of Stock-Option Fraud, People Say

 Do you see any pattern here?]