Every week, each broker dealer (BD) files a focus report which tallies the value of each security held. Since the ‘market’ for thinly-traded securities - e.g. Sub-prime Morgage Pools - is very difficult to value. If there is no market for down-rated, illiquid security, then the BD would have to hair-cut its capital as reserves. Eventually, the increased capital would eat all the firm’s free capital and the BD would violate the Net Capital rules established by the Exchanges. Poof. The firm closes.
Can the holders of these toxic mortgage pools establish a valuation based on income stream?
Thanks