What are "toxic assets"?

Question

I read an article that says the government plans to bail out financial institutions by buying their "toxic assets." What are toxic assets, in laymans terms?

Answer 1

Best Answer - Chosen by Voters

Let's say that Bob had a loan with Mellon Bank. The Loan is for $200,000 for a house and Bob pays 6% interest. The house is collateral, meaning Mellon gets the house if Bob defaults. But this house was valued at $275,000, so what is the worry?

So now Mellon Bank has "mortgage paper", which is an asset. They can sell the mortgage to anyone they wish. Bob will then be required to pay the purchaser, who will get the benefit of the 6% interest. It's an investment which may (or may not) make more money in the future. A good idea if Mellon needs money immediately.

But ol' Bob doesn't have the money to pay this mortgage. At the same time, the house value has greatly reduced to $150,000. Bob still owes $199,000.

If Bob defaults on this, Mellon will only be able to recover a portion of their money back. The mortgage paper has now become illiquid (the house can't pay the mortgage). Mellon is now unable to sell it. Why would somebody pay for an asset that guarantees you will lose money?

That mortgage has become a "toxic asset".

Source(s):

Accountant
Passed CPA Exam

Answer 2

An asset (like a bad loan) so bad there is no market for it.

Cash for trash, in other words.

Answer 3

Bad mortgages and bad stocks

Answer 4

It's all these subprime mortgages and bad mortgages. They are practically worthless cause people cant pay them back. The banks lended money to people who couldn't pay them back. Now these crappy mortgages are all packaged up and Wall St. sold them to different places, and this was done behind closed doors.

Answer 5

anal warts