Word: toxication
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...purpose of Emergency Economic Stabilization Act, known as the bailout plan, was to restore stability and liquidity to the U.S. financial system. The TARP, one of the Act's driving initiatives, was intended to be a mechanism for financial institutions to offload toxic assets, in general, heavily leveraged ABS securitized by banks and held on their books. An ABS is considered a toxic asset when the value of the ABS is less than the original investment. The toxic asset has a negative impact on the bank's balance sheet which, when multiplied, reduces the banks ability to lend...
...example, many Mortgage Backed Securities ("MBS"), a species of ABS, became toxic following the collapse of the housing market. Like all ABS, MBS derive their value from underlying loans, in this case, mortgages. A large group of mortgages provides the payment stream to the holders of ABS in the form of individual interest and principal payments made by a borrower to the bank...
...value, only a reduced value. Unfortunately, banks, in an effort to increase their investment returns, exacerbated the problem by using enormous leverage to purchase and securitize mortgage loans. Thus, even if MBS's value declined because of defaults, because of the use of leverage, the security could still be toxic to the bank...
...Finally, the seemingly unprecedented drop in prices together with increased default rates made it nearly impossible to assign value to MBS. As a consequence, MBS that had some intrinsic value were illiquid, and banks were forced to keep the toxic assets on their balance sheets...
...funds and private equity firms. In their new jobs, they can take advantage of the government's programs to buy newly financed assets and, if the value of that paper improves along with the market's liquidity, the profits from the transactions could be stupendous. As the value of toxic assets comes full circle, many of the people who helped break the system can make huge sums while they help...