I keep hearing people discuss Toxic Assets.
This is actually a misnomer of sorts; its not the Assets that are fatal, toxic, deadly, etc — its actually the Prices that are TOXIC.
Assets that are substantially mispriced are damaging to their holders’ balance sheets. Its much more accurate to think about these not as assets that are toxic — but as pricing that is toxic.
EXAMPLE 1: Bank A has $ 22 billion of mortgages on their books at 100 cents on the dollar,
— but we have since learned that: a) 7% percent are 30 days late; b) 12% are delinquent (60 days past due); c) 6% of these mortgages have defaulted and are in foreclosure;
These assets are certainly not worth nothing — but neither are they worth 100 cents on the dollar. They are considered toxic because there is a huge billion dollar write-down coming.
EXAMPLE 2: Bank A sells these assets to Private Equity firm Z for 46 cents on the dollar.
After the defaults and foreclosure writedowns, Bank Z calculates it is worth 67 cents on the dollar.
Same assets, different pricing, different outcome.
The toxicity is a function of pricing — not the assets themselves.