2010-05: The Pricing of “Troubled” Assets


The Troubled Assets Relief Program (TARP), authorized and appropriated by Congress in 2008, enables the Secretary of the Treasury to purchase on the government’s behalf so-called “troubled”assets the purchase of which is necessary in order to promote economic stability. However, virtually none of the money was used in that way; instead, the money was injected into banks and various companies (principally in preferred stock) to recapitalize them. High uncertainty on the valuation of the assets led to a large gap between bid and ask prices and the virtual shutdown of the market. Therefore, it is of vital importance to determine how to establish the appropriate values at which these securities should be purchased. This paper develops a methodology to price “troubled” assets. It starts with pricing individual “troubled” mortgages. Then it proceeds to pricing pools of “troubled”mortgages. This paper finds that single family mortgages in default in Freddie Mac and Fannie Mae portfolios can be settled as high as 81-98 cents on the dollar.

Publication date: 
February 27, 2010
Publication type: 
2010 Working Papers