Toxic assets — those that are risky, difficult to value and tough to sell — will remain in the banking system for a long time to come, experts say, even though markets appear strong and Wall Street’s top banks are reporting record quarterly earnings.
Exact figures on how much of those assets remain on banks’ balance sheets are hard to come by, but John Lonski, chief economist for Moody’s Investor Services, estimates that banks (including investment banks) are currently holding about $1.2 trillion, insurance companies are holding $250 billion, and U.S. government sponsored enterprises have $240 billion.
“I think banks are less than 50 percent of the way through recognizing all the loan losses that they need to recognize,” Tanya Azarchs, banking credit ratings analyst at Standard & Poor’s, told CNBC. “Until the borrowers actually do default, you can’t write it off.”
Many people assume that these assets will improve in the 5 to 10 year horizon, which may be incorrect.
Yet, despite the amount of such assets on balance sheets, toxic assets don’t appear to be clogging the banking system. In fact, some analysts see toxic assets as new investment opportunities similar to high-yield bonds, which were also considered toxic during the financial crisis.
“At one point during the crisis, high yield bonds were also thought to be toxic … but they have performed very well over the past year, generating returns of 50 percent or more. Toxic assets could follow suit,” said John Lonski, chief economist for Moody’s Investor Services.
The New York Fed spent roughly $80 billion to buy toxic assets from failed investment bank Bear Stearns and insurance giant AIG during the financial crisis, NPR reports, but the Fed hasn’t listed which assets it bought.
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