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Hub AI
Toxic asset AI simulator
(@Toxic asset_simulator)
Hub AI
Toxic asset AI simulator
(@Toxic asset_simulator)
Toxic asset
A toxic asset is a financial asset that has significantly decreased in value and for which there is no longer a functioning market. These assets cannot be sold at a satisfactory price for the holder. Because assets are offset against liabilities and frequently leveraged, this decline in price may be quite dangerous to the holder. The term became common during the 2008 financial crisis, in which toxic assets played a major role.
When the market for toxic assets ceases to function, it is described as "frozen". Markets for some toxic assets froze in 2007, and the problem grew much worse in the second half of 2008. Several factors contributed to the freezing of toxic asset markets. The value of the assets was very sensitive to economic conditions, and increased uncertainty in these conditions made it difficult to estimate the value of the assets. Banks and other major financial institutions were unwilling to sell the assets at significantly reduced prices, since lower prices would force them to reduce significantly their stated assets, making them, at least on paper, insolvent.
Toxic assets are also euphemistically labeled troubled assets.
The term was in limited use at least as early as 2006, and may have been coined by or popularized by Angelo Mozilo, founder of Countrywide Financial, who used the term "toxic" to describe certain mortgage products in emails in spring of 2006, as revealed in SEC filings:
Regarding Countrywide's subprime 80/20 loans:
When the supply and demand of a good equal each other, so buyers and sellers are matched, one says that the "market clears".
Classical economics and neoclassical economics posit that market clearing happens by the price adjusting—upwards if demand exceeds supply and downwards if supply exceeds demand. Therefore, it reaches equilibrium at a price that both buyers and sellers will accept, and, in the absence of outside interference (in a free market), this will happen.
This has not happened for many types of financial assets during the 2008 financial crisis, hence one speaks of "the market breaking down".
Toxic asset
A toxic asset is a financial asset that has significantly decreased in value and for which there is no longer a functioning market. These assets cannot be sold at a satisfactory price for the holder. Because assets are offset against liabilities and frequently leveraged, this decline in price may be quite dangerous to the holder. The term became common during the 2008 financial crisis, in which toxic assets played a major role.
When the market for toxic assets ceases to function, it is described as "frozen". Markets for some toxic assets froze in 2007, and the problem grew much worse in the second half of 2008. Several factors contributed to the freezing of toxic asset markets. The value of the assets was very sensitive to economic conditions, and increased uncertainty in these conditions made it difficult to estimate the value of the assets. Banks and other major financial institutions were unwilling to sell the assets at significantly reduced prices, since lower prices would force them to reduce significantly their stated assets, making them, at least on paper, insolvent.
Toxic assets are also euphemistically labeled troubled assets.
The term was in limited use at least as early as 2006, and may have been coined by or popularized by Angelo Mozilo, founder of Countrywide Financial, who used the term "toxic" to describe certain mortgage products in emails in spring of 2006, as revealed in SEC filings:
Regarding Countrywide's subprime 80/20 loans:
When the supply and demand of a good equal each other, so buyers and sellers are matched, one says that the "market clears".
Classical economics and neoclassical economics posit that market clearing happens by the price adjusting—upwards if demand exceeds supply and downwards if supply exceeds demand. Therefore, it reaches equilibrium at a price that both buyers and sellers will accept, and, in the absence of outside interference (in a free market), this will happen.
This has not happened for many types of financial assets during the 2008 financial crisis, hence one speaks of "the market breaking down".