Realistic Valuations of Subprime Securities Likely to Cause a Tidal Wave of Losses Across Wall Street
As more and more firms begin to put realistic valuations on their holdings of mortgage assets and related exotic securities, a tidal wave of losses is starting to move across Wall Street firms and will ultimately affect many of their customers as well. For months, many Wall Street firms have been valuing mortgage securities and related structured financial vehicles based on “fair value” methodologies. They continued to use these values despite the fact that periodic market transactions indicated that the valuations were unduly optimistic.
Recent events have confirmed just how excessive these “fair value” valuations were. Merrill Lynch’s recent sale of collateralized debt obligations appears to have started the ball rolling. In late July, Merrill sold $30.6 billion of collateralized debt obligations to Lone Star Funds for $6.7 billion or roughly 22% of face value. Moreover, Merrill had to finance 75% of the purchase price in order to consummate the deal. Lehman Brothers followed shortly thereafter by adjusting the values that it assigned to mortgage backed assets and other structured finance securities. Lehman reduced its Alt-A mortgage valuations to 39% of face value compared with 63% of face value in the previous quarter. Similarly, Lehman reduced values on subprime securities and second loan securities from 55% of face value at the end of the second quarter to 34% of face value at present. These reductions in value appear to be much more in tune with market conditions and the market transactions that have occurred over recent months.
Such revaluations across Wall Street will undoubtedly adversely affect many of the Wall Street firms as well as many customers whose holdings have been significantly overvalued based on unduly optimistic assumptions. Major margin calls, capital needs and investment losses appear inevitable.
Things on Wall Street look dismal as the Street learns that “instruments aren’t worth what Wall Street says they’re worth but only what the market will pay for them.”
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and individual investors with investment problems. For further information, please contact us.
