What is a toxic asset?

A toxic asset is one where the collateral (the thing that was bought) is actually worth less than the mortgage for it. Let me give you an example.

Say a person bought a house for $300,000 and financed it with a $300,000 loan from the bank. Two months later, the value of the house skyrocketed to $350,000. The cost of the house to the person is still $300,000 total, that does not go up. The bank holds mortgage paper worth $350,000 though (and it can sell it to other banks/people if it wants to, but that is another part of the story.) The problem comes in when house values dip and go below what the loan is worth and at the same time, the person who took the loan defaults on it. When this happens, the holder of the mortgage (the bank) has a mortgage that is worth more than the house itself and because of this no one wants the mortgage because it is essentially guaranteed that they will lose money on it. This mortgage is now a toxic asset.

It may be confusing when you first learn about it and I don't know if I explained it clearly enough, so ask questions if you have any.

Yeah, i'm agreed with myp. In the simple definition, toxic assets are the assets that you have that makes you lose more and more money, it's like poisoning your finance. Everyone don't want this toxic assets, but who know? People buy things or assets and hope that the prices will rise and keep rising, but sometimes their prediction missed and that assets become a toxic assets.

I think the really toxic assets are the derivitives and swaps that are either so complex that it literally takes a PhD in Mathematics to understand them or that are based on outrageous false assumptions, like the idea that the housing market will never have a downtrend.

curious said:

I think the really toxic assets are the derivitives and swaps that are either so complex that it literally takes a PhD in Mathematics to understand them or that are based on outrageous false assumptions, like the idea that the housing market will never have a downtrend.

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Well a toxic asset can really be a simple mortgage as I described above, but this current mess does have a lot of what you are referring to, which are more commonly called CDOs or "collateralized debt obligations." These are basically just assets made by splitting up mortgages and repackaging them, so that each CDO had bits and pieces of thousands of mortgages in it. It was a good way to invest in large parts of the market at once and it was basically a bet on the market going up as a whole. Sadly a lot of the people who created these CDOs did think the market would continue to go up forever and a lot of the people who bought them either agreed or didn't even understand what CDOs were. Obviously the market went down and when mortgages started going toxic, we were left with an even messier situation because so many of them had been split up and repacked into these CDOs.

The original mortgage backed securities made sense. They were a collection of mortgages with similar characteristics or a specific blend of characteristics. The security included the whole mortgage, not bits and pieces of it, so it was possible to make a reasonable statistical evaluation and rating for the collection.

Now the securities are composed of bits of mortgages, so payments 300-399 might be in one security, and payments 200-299 in another. They are put together with complex algorithms, and no one really knows what is in them.

There is also the beautiful situation caused by the credit default swaps. That convinced everyone that they were perfectly safe investments and encouraged the upward spiral. When AIG went down that caused a lot of these to become a lot riskier and worth a lot less.

Ah, yes, the ability to transfer your credit rating, based on your company's assets and performance, to any piece of junk that comes along. Those assets are beyond toxic, more like venomous.

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the same and than the earth namely the air and then the earth in the great cold the great dark the air and the earth abode of stones in the great cold alas alas in the year of their Lord six hundred and something the air the earth the sea the earth abode of stones in the great deeps the great cold on sea on land and in the air I resume for reasons unknown in spite of the tennis the facts are there but time will tell I resume alas alas on on in short in fine on on abode of stones who can doubt it I resume but not so fast I resume the skull to shrink and waste and concurrently simultaneously what is more for reasons unknown in spite of the tennis on on the beard the flames the tears the stones so blue so calm alas alas on on the skull the skull the skull the skull in Connemara in spite of the tennis the labours abandoned left unfinished graver still abode of stones in a word I resume alas alas abandoned unfinished the skull the skull in Connemara in spite of the tennis the skull alas the stones Cunard (mêlée, final vociferations) tennis… the stones… so calm… Cunard… unfinished…”