Background:
Inthefinancialmarketplace, newbuzzwordshavebeenpoppinginrecentyearsalloverthemedia, includinginTVtalkshowsandnewspaperarticles. Twophrasesinparticular, “toxicdebts” and “toxicassets,” havereceivedalotofattentioninthefinancialworld. BothtermswereoriginatedintheUSandfirstappearedasearlyasin 2006. Toxicdebtsandassetsrefertonon-performingassetsornon-performingloans. Inotherwords, theassetsorloansdonotyieldorgenerateincomeforthelender, andpeoplewhoreceivedtheloandonothavethemeanstorepaytheloan. Theseassetswereoncevaluablebutlaterlostthisvalueorbecamecompletelyworthlessbecauseofthefinancialcrisis. Becausetheseassetsarenolongervaluable, theybecame “toxic” tothebank. Toxicdebtsandassetscorrodethebank’sinherentvalueand, compriseitsabilitytomakeloanstoconsumers. Ifsuchaviciouscycleweretocontinue, thebankeventuallywouldnotbeabletosurvive. Howcouldthiseverhappen?
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Tom: HowcouldtoxicdebtsorassetseverhappeninAmerica?
Tina: Toxicdebtsorassetsoccurformanyreasons. Iamsureyouknowthattoxicassetsareacquiredorpurchasedatpricesthatdonotactuallyreflecttherealvalueoftheproperties.
Tom: So, inotherwords, thepropertiesweresoldundervalued? Howcouldthishappen?
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