No Such Thing As Toxic Assets . . .
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.
Not Toxic!
Same assets, different pricing, different outcome.
The toxicity is a function of pricing — not the assets themselves.
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October 9th, 2009 at 10:06 am
Great post Barry!
It’s always funny that most people can’t grasp that EVERYTHING has a price at which is is over-valued, fairly valued or undervalued… If you could get Michael Jordan in his prime for $1M, then you’re getting a steal. For $10-15M a year, maybe it’s a fair deal for both sides. If you had to pay him $250M a year, then YOU are getting screwed!
HCF
October 9th, 2009 at 10:07 am
These were *counterfeit loans*. They were rated “AAA” without expectation of significant repayment.
…
I understand your point. I just would like people to use a term that doesn’t hide the fraud.
October 9th, 2009 at 10:10 am
Toxic asset is simply a term coined by the popular press to describe these very low value assets.
There was an effort awhile back to soften the name. The name chosen for that task was legacy assets.
Like changing the name was going to make some kind of substantive difference.
October 9th, 2009 at 10:15 am
forgot that Bank A has .5% involved in a forest fire that Bank A ownes 10% of the insurance company stock
and another .5% being lived in by zombies who don’t really give a rats a(s)s
October 9th, 2009 at 10:23 am
>> Like changing the name was going to make some kind of substantive difference.
“Justice” is one of the biggest casualties in our economy. Calling these loans “counterfeit” would lead people to ask the question “where are the prosecutions?”
“Toxic” is an obfuscation.
October 9th, 2009 at 10:26 am
“Fraudulently Priced Assets” might be better — reminds the sheeple that it’s the banks themselves that made these “toxic.”
Of course, calling them “toxic” assets makes the financial illiterates in Congress think that if they spend money to get rid of them then they’re doing the right thing. Anyone know who first used the term? Doesn’t matter. It worked. They sure fooled Obama.
October 9th, 2009 at 10:26 am
What does “toxic” mean to the voter?
If we called them “counterfeit”, there’d be more voter anger and more regulatory reform. Whereas, so far, nothing’s been fixed. (Barry noted that recently.)
October 9th, 2009 at 10:26 am
true
October 9th, 2009 at 10:31 am
One of the head honchos overseeing the S&L cleanup said something like “this is the bottom line: regulators must always be on the lookout for Wall Street creating new ways to issue phony loans”.
We live in a credit-money economy. Loans are a form of currency. Issuing “AAA”-rated loans where some people skip the first month’s payment is counterfeiting our currency.
Diction matters.
October 9th, 2009 at 10:35 am
They are also toxic because of the “drag” on the institutions balance sheet.
Say for example your asset isn’t worth 100 but is worth more than the 30 the market is telling you it is worth, i.e. if you held the asset to term you would get more than the 30 some party is willing to pay you today. The institution isn’t getting credit for what the asset is worth but is being hit by its “toxicity” .
October 9th, 2009 at 10:50 am
Similar to how they keep reporting that Madoff stole $60 billion.
October 9th, 2009 at 10:50 am
These are Counterfeit assets. Bad loans that were based on overstated appraisals and overstated incomes that remain overstated in the banks books.FASB and the bank regulators not only allowed the banks to overstate their assets they encouraged them to do it – to delay the inevitable – which will be large scale foreclosures and waves of bank failures.
October 9th, 2009 at 10:51 am
Toxic is not something that WENT down, but something that WILL go down. I’ll tell you what’s toxic, US gov’t bonds. Get out while you can.
October 9th, 2009 at 10:53 am
A little like parrots
http://www.youtube.com/watch?v=4vuW6tQ0218&feature=player_embedded
October 9th, 2009 at 10:54 am
wunsacon
How bout “phony assets” then?
October 9th, 2009 at 10:54 am
Hey it’s Bank Failure Friday,time to guess the number of bank failures. Things have been pretty quiet but I think things will pick up with the holiday weekend, good time to pull the plug, get an extra day to put new names on the banks. I’m thinking of a number between 8 and 10 – I’ll go with 9 banks failures please!
October 9th, 2009 at 11:06 am
Clawback,
I certainly like that better than “toxic”. But, we don’t say “phony money” or “phony luxury goods”. When the government or a luxury goods manufacturer goes after imitators, they use the word “counterfeit”. I think the loan fact pattern is strongly analogous, enough so that we should choose the same adjective.
Well, at least, that’s what I’d vote for. :-)
October 9th, 2009 at 11:21 am
Either way, on my “taxpayer’s balance sheet,” they look a hell of a lot more like “toxic” liabilities than assets. And they aren’t “counterfeit,” either. LOL.
October 9th, 2009 at 11:25 am
How about “toxic banks?”
October 9th, 2009 at 11:28 am
I don’t dislike “toxic” here as much as you do, Barry, because I’m with the commenters above who point out the sketchiness of the paper (jumbo loan to migrant strawberry picker, for example).
Pretend for a minute that we have a functional SEC. And suppose an SEC investigation reveals that XX% of “AAA” MBS tranches were securitized on mortgage notes that are YY% fraudulent — criminally fraudulent, in fact, if anyone bothered to pursue it.
Now, back up a step. How would the SEC (hypothetical competent/diligent SEC, that is) react if you disclosed in your securitization filing that the MBS your IB just issued was “contaminated” with that amount of fraudulent paper?
Would it even be a legal MBS issue or would you expect to spend time in Club Fed???
October 9th, 2009 at 11:30 am
What about Britney Spears “Toxic”? Nobody wants her anymore either.
Toxicity is a function of overexposure (e.g. Hyponatremia), it’s not the total volume of water, but rather the speed of consumption. Too many bad loan in a short period of time = toxic (to pricing of the total)
October 9th, 2009 at 12:51 pm
And just how toxic are the (prices of the) assets that the Fed is holding?
October 9th, 2009 at 1:35 pm
How about “Toxic Titles”? Massachusetts might be joining the ranks of states whose courts are cracking down on who really held title to property at the time of foreclosure:
http://www.boston.com/business/articles/2009/10/09/title_troubles_leave_some_foreclosure_sales_in_limbo/
October 9th, 2009 at 10:43 pm
go back to the start of the melt down. the “toxic” reference was a reference to the impact the bad loans had on the holders’ total balance sheet. if they were just impaired or they could have been identified as simply over valued by a factor that you could define, then the word toxic may have been excessive. but at the time, it was impossible to value a tranche of cmbs or even whole loans on books. there was no market for them. so having pieces of securitized cmbs paper was TOXIC to the rest of an institution’s balance sheet. it was like a cancer that spread to the whole balance sheet. if you held those securities, you were infected by the toxic assets and you were screwed. they weren’t just money losers. they were toxic.
October 10th, 2009 at 8:02 am
and with the whole mark to market debacle, the toxic loans were sucking up the razor thin “reserves” that banks and institutions had. so while the loans may see a 20, 30 even 50% loss on paper, that made the banks insolvent.