Valuing hard-to-value assets

In this Class Notes article, Charles Smithson considers some of the lessons learned from the recent credit crisis. In particular, he reflects on the difficulties faced by many institutions in valuing illiquid structured finance instruments, and makes some suggestions on how this process can be improved

For the past 11 months, virtually the only thing my associates and I have done is value structured finance assets. It occurred to me that, before we forget the hard lessons we learned over this period, we should write them down in case we are called upon to value hard-to-value assets again in the future.

The complex assets we have been dealing with over the past 11 months - and consequently, the context for this column - are asset-backed securities (especially those with subprime US mortgages