Pricing Toxic Assets

Abstract

The term “toxic asset” is a nontechnical term used to describe certain financial assets whose value has fallen significantly so that there is no longer a functioning market for these assets. That is, there is no liquidity in the market, and the market cannot clear. This term became common during the financial crisis that began in August 2007 but predated the global financial crisis, as it was used in 2006 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:¹

“[The 100% loan-to-value subprime loan is] the most dangerous product in existence and there can be nothing more toxic.” (March 28, 2006)