Investors are numb from losses attributable to investments in collateralized debt instruments linked to the residential sub-prime mortgage meltdown and continuing market volatility from a variety of other causes. The question is, what should they do now? It may be time to contact a professional to explore the options.

Against the back-story of mind-boggling multi-billion dollar losses sustained by major banks, hedge funds and other financial institutions in the fourth quarter alone, the scope of the risk did not become apparent early enough for many investors who were induced to invest, even while the regulators, analysts and journalists were sizing up the evolving situation. As reported a little under a year ago in the International Herald Tribune (Gretchen Morgenson, “Investors in Mortgage-backed Securities Fail to React to Market Plunge,” February 18, 2007)):

“Back in May 2005, Alan Greenspan noted the complexity of collateralized debt obligations and the challenges they pose to ‘even the most sophisticated market participants.’ He warned investors not to rely solely on rating agencies to identify the risks in these securities.”

Such warnings, however, would have been difficult for ordinary investors to heed in light of the well known opacity of these instruments. Indeed, in a 2007 study cited by Ms. Morgenson that examined CDOs, the authors suggest that significant changes in the mortgage-backed securities (MBS) market “created an environment of understated risk to investors. . . .” Mason, Joseph R. and Rosner, Josh, “How Resilient are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?” at 2 (February 2007). Available at SSRN: http://ssrn.com/abstract=1027472.

Investors caught unaware in the downturn are now left with losses and a lot of questions. They should be proactive about finding the answers.