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Home > Cases > ABS & CDO Investment Losses > Subprime-Backed Securities Selling at Pennies on the Dollar — If They Sell at All

Subprime-Backed Securities Selling at Pennies on the Dollar — If They Sell at All

The actual market values of subprime-backed CDOs and similar securities have become apparent in recent weeks. The market has rendered these high-risk, ill-conceived investments essentially worthless. Here are just a few examples:

On December 3, 2007, the Wall Street Journal reported that E*Trade had purchased $3 billion dollars of mortgage-linked debt for an average price of 27 cents on the dollar. Of those assets, 60% had been rated double-A or higher. $1.35 billion of the assets bought by E*Trade at fire-sale prices were residential-mortgage securities consisting of loans made to borrowers with good credit histories, according to the article.

This helps explain why huge numbers of subprime securities are now essentially worthless. In January, managers of several CDOs held liquidation sales, unloading $5 billion of distressed securities from their portfolios at rock-bottom prices. (See Reuters, January 8, 2008.) Also, a $500 million CDO managed by Credit Suisse Group liquidated its mortgage bonds and related derivatives at prices below 25 cents on the dollar, wiping out all but its most senior class, said Standard & Poors. Thus the true market value of the securities is revealed. (Bloomberg.com, January 4, 2008)

Fire sales like this have forced holders of similar securities to reevaluate their investments based upon actual market conditions. And so, blanket numbers of these securities become illiquid, meaning that there is no ready market for them. Many of these subprime mortgage securities have been carried on the books of brokerage firms, money managers, mutual funds, and others at so-called “fair value,” an estimate usually far in excess of any true market value.

Certain Structured Investment Vehicles (“SIVs”) — those holding substantial amounts of subprime instruments and other asset backed securities — have dropped substantially in net asset value since early summer. Bloomberg.com reported on December 11 that “[t]he average net asset value for SIVs has tumbled to 55 percent from 102 percent in June, according to Moody's.”

Additional drops in value may well result as others attempt to unload these securities. We'll keep you posted.

In the summer of 2007, our group, who individually and collectively have extensive experience in representing investors against Wall Street, formed an affiliation. Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses. Contact us.


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