GLOBAL - Experts have warned that institutions are likely to lose significant amounts of money as part of the shockwaves from the ongoing problems in the US securitised mortgage debt market.
Gary Motyl, chief investment officer for global equities at Templeton Institutional, exclusively revealed to Global Pensions his forecast following the problems in the market for collateralised debt obligations (CDOs).
Motyl explained that holders of illiquid derivative and securitised instruments exposed to housing have been once again reminded of what happens to prices when buyers retrench and leave a market.
“It is fairly likely that more institutions will lose significant amounts of money as more CDO tranches turn bad,” said Motyl.
He warned that until the credit cycle unwinds, the full implications would not be known for buyers who have less than a full understanding of the complex securities they are purchasing and the lack of due diligence on credit risk.
Neptune Investment Management's head of US equities, Felix Wintle, also believes the current conditions are potentially dangerous for pension funds.
Wintle said: “If pension funds have bought CDOs the chances are they will lose money, and those who are holding risky securites will be trouble. But it all depends who is holding the securities as to who is affected.”
Despite it being a serious issue, Wintle said he did not expect it to spill out onto the broader market and cause a meltdown.
“It is something the market can and will absorb,” said Wintle.
The warning came as BNP Paribas announced it had frozen assets in three of its funds, as the US securitisation market had made it impossible to value the assets.
In a statement BNP Paribas said: “The complete evaporation of liquidity in certain market segments of the US securitisation market has made it impossible to value certain assets fairly regardless of their quality or credit rating.”
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