Toxic Assets: Facts, Lies and Hype

The Toxic Avenger © 1991 Marvel Comics

Toxic assets? What are they talking about?

It’s OK with me if bank regulators and accountants continue to obscure the passing of the investor-owned banking industry.

But could they at least keep their hands off the language? Assets are:

• Any item of economic value owned by an individual or corporation, especially that which could be converted to cash.

Source: Investorwords.com

That is, assets are good things that fall in the “nice to have” category.

The “Toxic assets” phrase refers to “misunderstood” mortgage and credit-related assets that now bloat bank balance sheets. It is said that they cannot be sold at a “fair” price. But there is no such thing.

“Toxic assets” is simply a polite 21^st century euphemism for:

• These are assets that we have improperly marked way too high, and they should really be valued at a much lower price.
• We would like to do this, but can’t. If we did so, it would make our institution insolvent and would probably lead to the destruction of the free world, as we know it, as well as Our American Way of Life.
• So would you please watch “Dancing With The Stars” and leave us alone, we know what we’re doing!

The term “toxic assets” is a term that financiers borrowed (they were in a borrowing mood) from the “toxic waste” produced by the (previously seen as nasty) industrial process or manufacturing sectors – industrial byproducts that pose a long-term health hazard.

But “toxic assets” can only BE toxic if their marked price is set too high – once the price has been set low enough, the damage has been done, we can roll up the insolvent institutions, and get on with the beginning of the recovery.

Who is fooled by this terminology? According to Google (GOOG) and Yahoo! (YHOO), not many.

Figure 1: Google Hits for “Toxic Assets” & Company Name,

March 10, 2009.

Above [See Figure 1] is a list of the names of 10 financial firms that I’ve haphazardly plucked from the holdings of the Financial SPDR ETF, XLF. I’ve included each company’s stock symbol as well as the number of “Google Hits” for that company’s name and the term “Toxic Assets.”

If you plot these “hits” against the percentage change in each company’s stock price, for Feb 2008 through Feb 2009, you get something like this:

Figure 2: Google Hits and Company Stock Price Decline

It’s pretty clear that no one is fooled by the terminology, and this can also be seen in the following scatterplot, which charts the percentage decline in stock prices against the Google hits.

Figure 3: Google Hits (“Toxic Assets”) versus Company Stock Price Decline

Could we just get on with it, but leave the language alone. After what’s happened to the economy, jobs, our homes, and any hopes for retirement, it’s all that we have left. Thank you!

Comments

[Fitz919:]

Don't waste our time with your google hit nonsense.

Mar 11 07:26 PM

[William Cowie:]

Nice piece, thanks! Nice to see some empirical support for what we all seem to perceive, but can't quite define exactly why...

Mar 12 12:02 AM

[cubanstockp...:]

I will start using a google measuring tool to track stock performance? What am I not to be fooled about. Toxic asset and c in a sentence will filter out every other article that is not about toxic assets in relation to C, C as in the ticker, not the measurement for the speed of light I get in quick google search results

Mar 12 02:35 PM

[Plumber 250:]

I don't know about google hits because I am basically electronicly challenged. But I do know that just because sentiment changes doesn't mean reality changes. A week ago these banks (Wells Fargo, Citi, BofA, etc) were totally in the crapper and this week they are soaring. This looks like a bear trap to me. Galbreath's book about the crash has numerous accounts of Wall Street leaders issuing statements about how the carnage was over and everyone could jump back in. That's all baloney. The tsunami of credit card defaults and student loan defaults is going to drive the banks further down and anyone that thinks otherwise should come see me about a bridge I have for sale in Brooklyn. What else is Buffet and Dimon going to say....oh! by the way our banks are technically insolvent and we are going to have to have a new round of capital raising at fire sale prices. Come on people, one Bernie Madoff may be on his way to jail, but there are still many others out there. Anyone who even thinks of buying bank stocks at this time needs to be fitted for a sleeveless white jacket. There is an old saying in retail....the butcher that has no lamb chops can afford to advertise them at the lowest price in town. What does it matter what the spread is on bank loans if people cannot afford, or are afraid to, make purchases of the products the money would be loaned for? In one breath the wizard of Omaha is saying he has never seen the consumer's wallet sewn so tightly shut and in the next breath he is telling us the banks are making loans at record spreads. Cars aren't selling, RVs aren't selling, the universities are scalling back because student loans have plummeted. Six months ago we were hearing how corporate balance sheets are bloated with debt, all of a sudden they all got well. What happened? Did they all hit the lottery? We have a debt problem in this country. Families and corporations are leveraged to the hilt. Consumers cannot spend their way out of that problem and corporations cannot borrow their way out of their problem. As long as the housing market remains a zombie the banks have junk for assets. When the million plus empty houses that are on the market are sold to families who can afford them, and when the houses that should be foreclosed on are foreclosed on and subsequently sold to families who can afford them (and that means having a job) then the banks will be out of the woods. Until that time, watch out for the bear traps.

Mar 13 12:43 PM

[Fitz919:]

The report about Citi being profitable during Jan and Feb was from an office memo. It was probably an answer to a question about how well they would have done if they didn't have to comply with mark to market accounting rules. It wouldn't surprise me a bit if this quarter they had another big fat loss under m2m.

Just watch...when earnings season comes around again, the market will be heading lower.


On Mar 13 12:43 PM Plumber 250 wrote:

> I don't know about google hits because I am basically electronicly
> challenged. But I do know that just because sentiment changes doesn't
> mean reality changes. A week ago these banks (Wells Fargo, Citi,
> BofA, etc) were totally in the crapper and this week they are soaring.
> This looks like a bear trap to me. Galbreath's book about the crash
> has numerous accounts of Wall Street leaders issuing statements about
> how the carnage was over and everyone could jump back in. That's
> all baloney. The tsunami of credit card defaults and student loan
> defaults is going to drive the banks further down and anyone that
> thinks otherwise should come see me about a bridge I have for sale
> in Brooklyn. What else is Buffet and Dimon going to say....oh! by
> the way our banks are technically insolvent and we are going to have
> to have a new round of capital raising at fire sale prices. Come
> on people, one Bernie Madoff may be on his way to jail, but there
> are still many others out there. Anyone who even thinks of buying
> bank stocks at this time needs to be fitted for a sleeveless white
> jacket. There is an old saying in retail....the butcher that has
> no lamb chops can afford to advertise them at the lowest price in
> town. What does it matter what the spread is on bank loans if people
> cannot afford, or are afraid to, make purchases of the products the
> money would be loaned for? In one breath the wizard of Omaha is saying
> he has never seen the consumer's wallet sewn so tightly shut and
> in the next breath he is telling us the banks are making loans at
> record spreads. Cars aren't selling, RVs aren't selling, the universities
> are scalling back because student loans have plummeted. Six months
> ago we were hearing how corporate balance sheets are bloated with
> debt, all of a sudden they all got well. What happened? Did they
> all hit the lottery? We have a debt problem in this country. Families
> and corporations are leveraged to the hilt. Consumers cannot spend
> their way out of that problem and corporations cannot borrow their
> way out of their problem. As long as the housing market remains a
> zombie the banks have junk for assets. When the million plus empty
> houses that are on the market are sold to families who can afford
> them, and when the houses that should be foreclosed on are foreclosed
> on and subsequently sold to families who can afford them (and that
> means having a job) then the banks will be out of the woods. Until
> that time, watch out for the bear traps.

Mar 13 11:03 PM