Friday, March 19, 2010

What Happended to Toxic Assets?

This is the most hectic semester I have had since arriving at Hope College. One result is that the quantity of posts to my blog is down. I will try to improve after spring break, during which I will be an expert witness and not catching up on my classes. I feel as if I am following the Japanese auto model--"just-in-time" teaching. I don't recomment it.

On another note. Sen. Dodd has put forward a plan for financial regulation. It made me wonder what ever happened to the toxic assets we heard so much about a year or more ago? A toxic asset is not necessarily a bad asset or a valueless asset. A toxic asset is an asset for which the value is unknown. It may be that the banks and other market participants now know the value of the assets, have written off the bad ones and are comfortable with the good ones. I don't know and haven't heard anything about it.

Another question I have concerns the failure of banks to extend loans. I understand that the number of loans is down. But there could be two reasons--people with a lot of debt already are not applying for loans, or people are applying but banks are turning them down. Actually, it is likely both are partially correct. But banks are more likely to be cautious if they still have toxic assets on their balance sheets, which brings me back to my first question. I am hopeful that recovery will build but am still concerned about some weaknesses that may still exist in the economy.


  1. John, I've been curious about toxic assets as well, especially since I also haven't heard much about them lately. I recently heard an NPR podcast that shed a little light on the topic.

  2. Professor Lunn,
    I think are a few other factors involved in the lack of lending by financial institutions (and I'm not so certain that "more lending" is optimal).

    First, regulatory uncertainty has definitely been an issue. Politicians and the media have blasted institutions for not lending, especially to small businesses. However, the unseen is that banking regulators are often requiring writedowns on existing loans - even some loans that are currently performing. This regulatory uncertainty has surely put a chilling effect on some institutions willingness to lend. Further, writedowns of existing loans could be preventing some institutions from making additional loans because their capital levels are not sufficient to engage in certain lending projects.

    Second, in the industry that I work in - credit unions - institutions are limited in their ability to make "member business loans" by an arbitrary cap. While there are certain exceptions to the calculation, generally credit unions are not allowed to lend more than 12.25% of their assets to members that are businesses.

    At least too me, it seems counterintuitive for politicians and the media to see more lending - regardless of credit quality - as the solution for a problem that involved unwise lending. The granting of loans is a detailed, intricate process and the pleads for "more loans" - whether they be to lower-income persons or small businesses - will not magically make these borrowers more able to repay their loans.

    BTW, I've enjoyed reading both your blog and Professor Claar's blog.