Gambling on toxic subprime securities temporarily increases

In what has become an annual rite in the toxic subprime securities market, in the hopes of creating interest from buyers Wall Street is attempting to mark up the price of these securities.

Both the Wall Street Journal and Bloomberg published lengthy articles (see here and here) on how hedge fund investors, including some who made a lot of money shorting these securities prior to the credit crisis, are thinking of investing.

Regular readers know that investing in these bonds poses a number of challenges.

The biggest challenge is that these bonds do not provide adequate disclosure so that an investor can actually know how the underlying collateral is currently performing and use this in an independent valuation of the bonds.  As a result, investors are basically blindly betting.

This challenge is magnified because the Wall Street firms that are selling the bonds have better access to current performance information through their investments in mortgage servicers and can use this information to value the securities.  As a general rule of thumb, if Wall Street has an informational advantage (say tomorrow's news today), Wall Street makes money on it.

Further compounding the challenge as the Wall Street Journal said is

Market prices for individual subprime bonds are difficult to track, because there are thousands of securities with varying characteristics, and most don't trade often. 

That is because there is a buyers' strike and the market is illiquid.

The buyers are on strike because they do not have the current information on the performance of the underlying collateral they need to independently assess the risk and value the securities and eliminate Wall Street's informational advantage.