Markit in Talks With Banks on Index Tied to Auto-Loan Bonds

March 5 (Bloomberg) -- Markit Group Ltd., the owner of benchmarks for the $45.5 trillion credit-derivatives market, plans to start an index that would allow investors to bet on securities backed by auto loans, people with knowledge of the plan said.

Lehman Brothers Holdings Inc., Morgan Stanley, Bear Stearns Cos. and Merrill Lynch & Co. are among the firms in talks with New York-based Markit to create the index, said the people, who declined to be named because the discussions are preliminary. The index would be linked to debt backed by auto loans from issuers such as Detroit-based GMAC LLC and Ford Motor Credit Co.

The Markit index would be the first benchmark allowing investors to speculate on the credit quality of securities backed by auto loans in the same way they use indexes to bet on subprime and commercial mortgages. Those indexes plunged in the past seven months as subprime mortgage defaults rose to records, sending investors fleeing to safer assets such as U.S. government debt.

``The notion of an index linked to auto-loan securities makes sense because it will allow investors to short the consumer,'' said Jeff Salmon, portfolio manager at Bank of New York Mellon, which has $500 billion in assets under management.

Markit spokeswoman Teresa Chick in London declined to comment. Spokespeople for Lehman, Morgan Stanley, Bear Stearns and Merrill Lynch, all in New York, declined to comment.

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Credit-default swaps are based on bonds and loans and used to speculate on a borrower's ability to repay debt. They were conceived to pay the buyer face value in exchange for the underlying securities or the cash equivalent should the borrower fail to adhere to debt agreements.

Derivatives are contracts whose value is derived from assets including stocks, bonds, currencies and commodities, or from events such as the weather or changes in interest rates.

The auto index would act as a credit-default swap contract and would be linked to bonds backed by auto loans and offer protection if the securities aren't repaid as expected, in return for regular insurance-like premiums.

Delinquencies on prime auto loans in securities issued in 2006 rose 18 percent compared with 2005 and exceed the ``historical highs'' of 2001, Standard & Poor's said in a report Jan. 22. Yields on three-year, AAA rated bonds backed by auto loans trade at 140 basis points more than benchmark rates, up from 75 basis points at the start of the year, according to Deutsche Bank AG data.