Billions of dollars’ worth of the complex securities at the heart of the financial crisis are being liquidated, enabling banks, insurance companies and other investors to clear toxic assets from their books.
Market participants say the unwinding is occurring in the market for collateralised debt obligations, complex securities backed by the payments on mortgages, corporate loans and other debt.
Hundreds of billions of dollars of CDOs have defaulted, but the structures can only be liquidated if the underlying collateral can be sold. In recent weeks, more investors have been buying the underlying assets at deep discounts, leading to increased trade and boosting prices for some existing CDOs.
'There has been a significant increase in the amount of CDO liquidations,' said Vishwanath Tirupattur, analyst at Morgan Stanley. 'The rally across asset classes has given investors an incentive to liquidate.'