What Are "Toxic Assets"? | Why Aren't Banks Lending?

Michael Marcin - CFO, Crest Capital - 07/17/2009

The caption "toxic assets" has become a familiar term used in the news throughout the first half of 2009, but what exactly is the moniker describing? "Toxic or troubled assets" are essentially loans (a) made to borrowers who currently are not (or were never) creditworthy, and are (b) collateralized by assets that are worth less than the remaining balance of the loan. A simple example would be a home mortgage that the delinquent / defaulting borrower still owes $300,000 yet the home is now only worth $200,000. But mortgages are not the only form of toxic assets. Equipment loans and leases made to businesses that can't make the payments - for equipment that now has considerably less value than before the economic downturn – are causing serious losses as lenders attempting to liquidate collateral at auction receive far less than the loan balance. For a detailed explanation of "troubled assets" and where this issue stands, an excellent analysis: The Fall of the Toxic-Assets Plan in The Wall Street Journal. Or for a more "user-friendly" explanation (only 7 minutes), check out this video from American Media's Marketplace:

Where's the toxic waste? from Marketplace on Vimeo.