A year on from the demise of Lehman Brothers, toxic assets may no longer be in the headlines, but they have not disappeared. Despite the billions of dollars and pounds made available by governments across the world, they continue to be a barrier to economic recovery.
Source is delighted to announce the publication of its report, written in conjunction with Navigant Consulting www.navigantconsulting.com/creditcrisis. Demystifying Toxic Assets examines the reasons why these assets remain so hard to value and provides guidance to procurement people who are responsible for bringing in the specialist expertise increasingly required. To receive a copy of this report, please email Edward.Haigh@sourceforconsulting.com.
To see press coverage relating to the launch of this report, please see Source in the News page
An extract from the report:
The term “toxic asset” entered our vocabulary in 2006, initially applied to quite specific types of mortgage products. However, the last two years have seen it take on a wider meaning, signalling a more substantial breakdown in conventional market dynamics. The underlying problem was that investment bankers bought loans, such as mortgages, from lenders, arranged them in pools and issued bonds based on the cash flows of the pools. This process of securitisation detached the credit of the loans from the credit of the originating lenders. “This meant that the latter lent money to anyone for any reason,” says Leigh Skene at Lombard Street Research. “By 2007, the major requirement to get a loan was to have a pulse.”
Even though prices of toxic assets have fallen dramatically, the demand for these assets has not picked up. This is contrary to classical economic theory which argues that prices in a free market adjust in line with demand and supply: thus, where supply exceeds demand, the price falls to a point where the number of buyers increases and absorbs the excess capacity.
Before the financial crisis, financial institutions had invested enormous sums of money in complex financial assets, the value of which was inflated because of the benign risk environment of the last decade. As defaults starting to creep in and worsening economic news made the headlines, the value of these assets started to fall. Financial institutions, with enormous holdings of these assets were unwilling to accept such low prices as it could cause losses sufficient to make them technically bankrupt. The result was a situation in which the assets sat – and in many cases continue to sit – on balance sheets.
With the market breaking down, governments across the world stepped in to provide ways in which these assets could be bought, at the expense of taxpayers, in order to resolve the paralysis of the entire financial system, but not before some institutions had to seek cover by merging with others and some, notably Lehman Brothers, went to the wall.
Government intervention has postponed, however, not resolved the issues. Despite the billions of dollars and pounds made available, toxic assets remain and continue to be a barrier to economic recovery. “The fundamental problem has remained untouched,” concluded the Wall Street Journal in July 2009, “insufficient information to permit estimated prices that both buyers and sellers find credible.”
The aim of this report is to provide guidance to procurement managers who are responsible for purchasing consulting services and who may find themselves buying in specialist services in this field:
1. The first part of the report looks at:
- The different approaches to the valuation of toxic assets and the reasons why they have proved almost insuperably problematic in the current environment.
- What the future may hold, both for financial institutions that succeed in dealing with these assets and those that fail to do so.
2. The second part examines:
- Where financial institutions may find it helpful to have external assistance.
- The approaches adopted by different consulting firms in this field.
Report launch
The report was launched at a roundtable discussion at the Charlotte Street Hotel in September 2009 with a range of financial institutions and media in attendance.
About the report sponsor
Navigant Consulting, Inc. (NYSE:NCI) is a specialised independent consulting firm providing professional services to assist clients in identifying practical solutions to the challenges of uncertainty, risk and distress. We focus on large industry sectors that are highly regulated and are undergoing significant change. For over two decades, clients have counted on our dedicated professionals to provide objective consulting services designed to avoid or resolve business disputes, solve operational challenges, lower costs, reduce risk and increase efficiency. Navigant Consulting is an international consulting firm with nearly 2,000 professionals in cities across the United States, Canada, Europe, and Asia.
To view the Navigant page on Source, please click here.
To see press coverage relating to the launch of this report, please see Source in the News page