Toxic assets are non-performing assets that are not only not paying interest but depreciating (losing principal) rapidly, with no likelihood of stabilizing in the current environment. The most common toxic debt talked about or referenced is subprime mortgage debt.
According to some estimates there was about US$1.2T of subprime mortgages written. The reason there is so much toxic debt out in the market on banks and others’ balance sheets is because derivatives actually multiplied the exposure to this toxic asset class.
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