Toxic asset

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Toxic assets (also referred to as "toxic debt") refers to the various asset classes that were hit hardest by the 2008 financial crisis, such as sub-prime mortgages – the original "toxic asset". These assets have proved financially ruinous; they have had their valuations cut and demand for them has dried up. Holders of toxic debt have seen huge losses and some have been forced to raise emergency capital. [1]

Some of the toxic debts are wrapped up in collateralized debt obligations (CDOs). At least half of all CDOs sold in the U.S. in 2006 were loaded with subprime mortgage debt, according to Moody’s and Morgan Stanley. [2]

In March 2009, U.S. Treasury Secretary Tim Geithner unveiled long-awaited proposals to deal with these toxic assets. The plan puts together a small amount of private capital with a large amount of public money to buy as much as $1 trillion of the bad assets. The Treasury will direct five private funds to manage the program. Firms in the running include BlackRock and PIMCO.[3]

References

  1. Q&A All about 'toxic' debt. Telegraph.co.uk.
  2. The Poison in Your Pension. Bloomberg.
  3. Dr Geithner's bank rehab. The Economist.