Toxic Assets

What Are Toxic Assets?

Toxic assets are investments that are hard or unbearable to sell at any worth because the claim for them has distorted. There are no eager buyers for toxic assets because they are widely apparent as a certain way to lose money.

The term toxic asset was invented during the financial crisis of 2008 to define the collapse of the market for mortgage-backed securities, collateralized debt obligations (CDOs) and credit default swaps (CDS). Vast quantities of these assets sat on the books of various economic institutions. When they became intolerable to sell, toxic assets became a real threat to the creditworthiness of the banks and institutions that possessed them.

Understanding Toxic Assets

Toxic assets were initially called troubled assets. It took the financial catastrophe of 2008 to produce a more vivid term. That was when it became clear that some of the biggest U.S. financial organizations were sitting on a vast amount of worthless assets. In fact, they were losing value at a pace that many had not thought was conceivable.

This exaggeration of the downside risk might have been in part a lack of imagination, but it was worsened by a lack of rigor by the ratings firms.