Toxic assets are also known as dead assets because they have been utilized in the past and they are of no more value at present. “Toxic assets had a value at some point in time” (Smith, 2010). Toxic assets do not have any present value whereas many people, who have such assets, believe that their toxic assets are still of the same value as they had in the past. However, the reality of the value of those toxic assets is quite different.
Toxic assets often result in minimizing the liquidity of the organizations that possess such assets. It is because of the fact that toxic assets have no clear value and if the financial organizations such as banks acquire a large number of toxic assets assuming them to be of great value, minimal liquidity occurs because the value of the assets does not increase in reality, rather it just increases in the bankbooks. The banks find it very difficult to sell the assets in order to get the blocked money back in hands. Toxic assets are neither good for financial organizations nor for the economy of a country. They are worthless for the banking institutions as it becomes difficult for the banks to sell them to some other person at a reasonable price. Even if the financial sector of a country attempts to cope with toxic assets, the result is most likely to be the radical freefall of the country’s economy.
Toxic asset is a form of Mortgage-Backed securities. Mortgage-Backed securities include loans that are given by a bank to a person to help the person build his own house. Banking institutions provide loan to the people, which is taken back from them along with interest on monthly basis. The repayment of loans to the banks is not an easy process for the people as the repayment is composed of high interest and the principal amount. When the people are not left with enough money to repay the loans to the banks due to increased sub-prime mortgage interest rates, the cycle stops and