Why Was the CMBX Ever Interesting?

I became interested in the CMBX through my curiosity about the future of commercial real estate. Would the real estate crisis spread to commercial owners?

Why the CMBX? It's a long story:

The first thing to do in assessing the expected future performance of an industry is to look at publically traded companies. They report their performance and projections. The collective reaction by the market is reflected in equity prices. It's pretty easy to see what people think is going to happen in publically traded companies.

The problem is that a large percentage of commercial real estate is not held in public companies. There are listed REITs but there is also a vast amount owned by private companies and investors.

If you can't see a market assessment of risk in equity prices, you can look at debt. The yield on bonds tells you something about risk. The higher the return, the more investors are being compensated for the potential risk of default.

The problem with debt is that this market has not been very liquid since the crisis began. There are very few real estate companies that have been issuing new debt during this period. At current low prices, these bonds do offer good cash flow returns.

If the debt market is stuck then perhaps the market for insurance default would be a good proxy for the health of the commercial real estate sector. After all, it turns out that the ABX index (a similar index for residential mortgage default CDSs) predicted the mortgage crisis several months in advance.

Now, the problem with the CMBX is that rather than simply tracking the price that bond holders pay for insurance, it has become an investment vehicle for hedge funds and others to speculate and bet against the issuers of the debt. This speculation is in turn hurting and distorting the actual debt market.

Finally, recent developments such as the bankruptcy of Lehman Brothers and the trouble at AIG mean that the issuers and dealers of the Credit Default Swaps are themselves in trouble. Are investors willing to buy derivatives when the 'counter-party' may suddenly disappear?

At this point I wonder if the CMBX index is related to conditions in the real estate sector at all. It might just be a speculator distorted, meaningless red line.