Toxic Assets Discussion Paper

Summary

Banks have a hard time lending money due to toxic assets. Toxic assets result from the housing market, which has tumbled and decreased in value hence adversely affecting banks and the economy. Toxic assets are those assets held by banks especially large banks in large numbers and the plummeting values has led to decrease in revenue and losses to the large banks.  The banks do not gain from the assets, and, therefore, they continue losing, as their balance sheets do not seem to balance because of the ever-decreasing value of their assets. Toxic assets result from the myriad investments banks have made on mortgages. Their loss in value affects the balance sheets of the organizations and hence their profitability. Smaller banks sold most of their mortgage loans to large banks who then passed most of the money they got from the mortgage loans to the investors. The vetting criteria of getting a mortgage was bypassed to enable those of a low credit rating to own homes. Some of them were not able to finish up on their payments and, therefore, there were more foreclosures that result in low value for the houses (Peavler, 2015).

As foreclosures rose, the people were not in a position to pay for their homes, and therefore banks lost since they had bought the subprime mortgage securities, and the lack of people paying for the mortgages and the falling in value made the banks incur losses. Therefore, the fall in value meant that the banks could not recover the initial amount they had invested and, therefore, had to do with the stalled payments. The incurred loss put the banks in a difficult position to provide lending services to their customers. Big banks like Citicorp incurred losses, and it meant that they could not lend money to customers who then could not conduct business or buy more houses, which meant that companies lacked money for their normal operations (Eichengreen, 2015). As such, spending was reduced to a minimum and the economy suffered. A recession resulted which forced many people out of employment but still there was little spending, and the economy declined as a result.

Discuss a learning objective (Future Value, Present Value, etc.) that you feel is appropriate and applicable to this current event news article.

A learning objective in this article is that banks, which are valuable in the growth of any economy, should forecast their expenditure to ensure that they do not invest in toxic assets, which will hurt them in the future. Foreclosures have been on the rise as explained above, due to defaulted homeowners who have enabled housing value to go down (Scheer et al., 2010). The banks would have remained as strict as before, and this would have prevented the foreclosure because people would be evaluated on their payment and any defaults in payments minimized (. Future value of housing is still bleak

Conclusion

It is, therefore, important for the state and the financial sectors of the economy to scrutinize various pointers that would affect the economy gravely. Toxic assets have affected the lending of money, which is important in an advancing economy like the United States. Toxic assets have affected the financial statement like balance sheets, which have resulted Spending one of the predictors of a growing and healthy economy. Banks should, therefore, be careful not to have too many toxic assets that may affect their lending and thus affect the economy of the country gravely. The assets due to their falling value affected the financial statement of the banks. The government may be eventual increase taxes to get the necessary revenue for its daily operations. Therefore, toxic assets have a grave effect on the economy of a country. Banks should avoid toxic assets at all costs.

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