What are toxic assets?

"Toxic assets" are assets than cannot be sold and are guaranteed to lose money. Most assets can become "liquid" by selling them off for money. Assets that cannot be sold are "illiquid," as no money can be made from them.

If a house is purchased for $300,000, the mortgage company has an asset. As long as the buyer continues to pay his mortgage, the asset is a good one. However, if the buyer stops paying on the mortgage and the value of the house has dropped, then the bank is stuck with an asset that is likely to lose money; it is therefore a toxic asset.