Toxic assets facts for kids

The term toxic asset is a simple way to describe certain financial assets that have lost a lot of their value. It also means that there's no longer a working market where these assets can be easily bought or sold. This term became very common during the financial crisis that started in August 2007. Toxic assets played a big part in that crisis. When the market for such assets stops working, it's often called "frozen."

What Are Toxic Assets?

Toxic assets are like things you own that suddenly become very hard to sell. Imagine you have a rare trading card, but then everyone decides they don't want that card anymore, and nobody knows what it's worth. It's still a card, but its value has dropped, and you can't find anyone to buy it. That's similar to a toxic asset.

Why Assets Become "Toxic"

Assets become "toxic" for a few main reasons:

• Value drops: Their actual worth goes down a lot.
• No buyers: There are very few people or companies willing to buy them.
• Uncertainty: It's hard to figure out what they are truly worth because the economy is unstable.

The "Frozen" Market

When a market for toxic assets "freezes," it means that buying and selling stops almost completely. This happened with some toxic assets in 2007, and it got much worse in 2008.

Reasons for a Frozen Market

Several things made the market for these assets freeze:

• Economic worries: The value of these assets was very sensitive to how the economy was doing. When people became unsure about the future of the economy, it was hard to guess the true value of these assets.
• Banks' reluctance: Big banks and other financial companies didn't want to sell these assets at very low prices. If they sold them cheaply, it would make their own financial records look bad, possibly making them seem like they didn't have enough money.

See also

In Spanish: Activo tóxico para niños