Business, Legal & Accounting Glossary
A toxic asset is any asset that has a current market value significantly below its book value. Further, the market for a toxic asset is very illiquid. It is virtually impossible to sell a toxic asset at a reasonable price, if at all. A toxic asset has a damaging impact on any company’s balance sheet. With many toxic assets on its books, a company can quickly become insolvent. Toxic asset was a term frequently used during the banking crisis of 2007-2009. In this case, the term toxic asset referred to collateralized debt obligations, credit default swaps, or mortgage-backed securities.
A mortgage-backed security became a toxic asset as a result of the following… First, with the sharp decrease in house prices underlying the mortgage-backed security, its value dropped dramatically. Second, the holder of this mortgage-backed security couldn’t find a buyer. Indeed, unless house prices went back to inflated high prices underlying most of those mortgage-backed securities, the purchaser of this toxic asset was guaranteed to lose money. A sharp decrease in value and illiquid trading markets are two key features of a toxic asset. Although the term toxic asset is often associated with assets tied to bad loans (i.e. toxic in nature), any asset can become a toxic asset in a price falling environment where demand dries up. When companies mark to market their assets, under certain economic conditions, a good asset can become a toxic asset.
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This glossary post was last updated: 5th February, 2020