April 7, 2009

Is Toxic Waste Undervalued?

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Several academic economists published a paper a few days ago suggesting that toxic assets are priced at pennies on the dollar because that’s exactly what they’re worth.  Anyone who thinks they’re undervalued because of illiquid markets and forced fire sales is just kidding themselves.

Maybe!  But Economics of Contempt isn’t convinced.  It turns out the authors analyzed investment grade corporate debt, not housing securities:

Are they serious? The Treasury is arguing that the prices for mortgage-related securities are artificially depressed because of illiquidity and fire sales. No one is arguing that investment grade corporates are underpriced due to illiquidity and fire sales. That’s why ABS and CDOs backed by investment grade corporates aren’t eligible for the TALF or the PPIP. The fact that prices for tranches of CDOs backed by investment grade corporates are accurate is completely irrelevant to whether prices for mortgage-related securities are accurate.

This is above my pay grade as usual, so just consider it useful data for now.  Seems like a pretty reasonable criticism, though.

Via Megan McArdle.

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