Anticipated liquidations by managers of collateralized debt obligations (“CDOs”) are likely to put more downward pricing pressure on the already depressed prices of subprime securities. Managers of several CDOs announced that they are liquidating over $5 billion of distressed securities from their portfolios over the next few days, as reported by Reuters on January 8, 2008. It is anticipated that these fire sales are likely to fetch bottom prices and may force holders of many similar securities to reprice their investments based upon market prices. These securities are illiquid, meaning that there is no ready market to establish pricing. In many cases, these securities have been carried on the books of brokerage firms, money managers, mutual funds, and others at so-called “fair value,” which is an estimate usually far in excess of any true market value for these securities.
Over recent months, similar liquidations have realized only a small fraction of the original face value. For example, on December 3, 2007, in a Wall Street Journal article entitled A CDO Floor of 27 Cents on the Dollar?, David Reilly, Gregory Zuckerman and Serena Ng reported $3 billion dollars of mortgage-linked debt was purchased from E*Trade Financial Corp. for an average price of 27 cents on the dollar. Sixty percent of those assets were rated double-A or higher, and $1.35 billion of the assets were residential-mortgage securities consisting of loans made to borrowers with good credit histories, according to the article. More recently, on January 4, 2008, Bloomberg.com reported that a $500 million CDO managed by Credit Suisse Group liquidated its mortgage bonds and related derivatives at prices of less than 25 cents on the dollar, wiping out all but its most senior class, according to Standard & Poors. These transactions reflect the true market value of the securities.
Similarly, the net asset values of structured investment vehicles (“SIVs”) holding substantial amounts of subprime instruments and other asset backed securities have decreased significantly within the last seven months, and may be facing further declines as a result of the liquidations described above. On December 11, Neil Unmack of Bloomberg.com reported that “[t]he average net asset value for SIVs has tumbled to 55 percent from 71 percent a month ago and 102 percent in June, according to Moody’s.” Additional drops in value may well result as liquidations establish actual market values of the securities.
Page Perry is an eight lawyer Atlanta-based law firm with over 125 years collective experience representing investors in securities related litigation and arbitration. While past results are not necessarily indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. The firm is currently involved in representing both institutional and retail investors who lost money in the collapse of the sub-prime mortgage market and related structured investments, including the Bear Stearns hedge funds and Morgan Keegan bond funds. For further information, please contact www.pageperry.com.