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Toxic assets are assets that have experienced a significant drop in value and lack an active market where they can be sold. Toxic assets are also known as troubled assets.
The most famous examples of toxic assets are subprime mortgages. After the real estate market collapsed in 2007-2008, subprime mortgages lost much of their value and became almost impossible to sell. Because the market for subprime mortgages was illiquid, any owner of a subprime mortgages had to sell them at a fire-sale price if it was necessary to unload them. Banks, insurance companies and hedge funds had a relatively high number of these toxic assets on their balance sheets, and once their value plummeted, many of these firms found that they were insolvent.
Toxic assets are assets that becomes illiquid when its secondary market disappears. Toxic assets cannot be sold, as they are often guaranteed to lose money. The term "toxic asset" was coined in the financial crisis of 2008/09, in regards to mortgage-backed securities, collateralized debt obligations and credit default swaps, all of which could not be sold after they exposed their holders to massive losses.
