Boom for toxic-asset analysts

Published: February 3 2009 20:14 Last updated: February 3 2009 20:14 The financial crisis is creating a boom for independent analysts who are being hired by banks and investors scrambling to put a number on the value of some of the trillions of dollars of toxic assets that continue to plague the global financial system. The creation of some form of “bad bank” that would buy them is one of the possible financial clean-up plans that is under consideration. The valuation experts, who could play a key role in these plans, range from big accountancy firms to small start-ups that have been set up by former investment bankers. “There are many, many people looking for some kind of independent view on the value of the toxic assets they own,” says Arturo Cifuentes, a structured finance specialist in New York. “Investors used to rely on banks and credit ratings. Both these sources have lost credibility.” Analysts at Barclays Capital estimate that, based on the amounts of troubled assets identified in recent government bail-outs of Citigroup and Bank of America, the value of toxic assets that needs to be tackled by some kind of government plan ranges from $1,900bn to $2,800bn. Valuation experts are being paid by banks’ boards, by investors such as large pension funds and by small university endowments and insurers to come up with some estimate as to what these assets are worth. Total ‘troubled’ assets $bn - Total assets (all banks) Possible ‘troubled’ assets (estimates) Low High Loans 1st Lien Mtg 1,865 828 1,104 2nd Lien Mtg & HEL 890 545 726 Consumer 945 47 189 CRE 1,249 250 499 C&I 1,289 171 228 Securities Private Label Mortgages 296 55 73 Total 6,532 1,896 2,820 Source: Barclays Capital Barry Silbert, chief executive of SecondMarket, which focuses on illiquid securities and will soon expand its market to include the toxic assets, says there are about 15 established firms that offer services to value mortgage-backed securities and collateralised debt obligations (CDO), and another “several dozen” independent groups of former structured product investment bankers and rating agency employees have been set up. Even the most seasoned valuation experts admit that they cannot pinpoint the exact value of these assets. This problem remains because their ultimate value will depend on such things as how far house prices will tumble. “Securities backed by mortgages and other loans are so difficult to value because there is no way of knowing exactly how much of the principal of the loan you will be getting back,” says Robert Keiser, senior director, markets, credit and risk strategies, a division of Standard & Poor’s. “When the value of the underlying assets, like houses, was rising, this was not an issue, because you knew you would always get the principal back. “The difficulty now is in forecasting how much house prices, for example, will fall. No-one knows the exact answer.” The value of structured securities also depends hugely on where exactly investors rank. The securities were sliced and diced and sold to investors seeking different levels of risk. Often, it is only the most senior securities that will get repaid, meaning their value could still be close to 100 cents on the dollar. Other tranches, even those with triple A ratings, could be worth very little if there is not enough money left to pay them.