Planet Moneys Toxic Asset - Research Paper Example

 Planet Money’s Toxic Asset Toxie The onset of economic meltdown not only brought in its wake, immense socio-economic disasters, but also raised many vital financial and legal questions. In the current scenario, a wide range of academic institutions, law schools, intellectuals, financial organizations, statutory bodies and also the print and digital media are putting in effort to come to terms with these burning questions and issues. The NPR produced blog and podcast ‘Planet Money’ also chipped in to analyze this economic debacle. In fact, ‘Planet Money’ invested in a $ 1000 worth toxic asset nicknamed ‘Toxie’ that it intended to serve as its window to the ongoing economic recession (Planet Money, 2010a). Toxic Assets The busting of the housing boom brought into vogue many unheard of and to some extent novel terms and words like ‘subprime mortgage’ and ‘toxic assets’. Now, what are the ‘toxic assets’? One can certainly attempt a simple explanation to this term. Suppose a person named Mickey avails a loan from the ABC Bank at 7 percent interest to purchase an apartment worth $ 300,000, with the apartment serving as the collateral. That Means, if Mickey defaults, the ABC Bank gets the apartment. In a situation when the apartment is prized at $ 350,000, this mortgage definitely serves as an asset for the ABC bank. In case the bank needs money, it can sell this mortgage to somebody else. Anybody who buys this mortgage from the ABC Bank qualifies to get from Mickey, the agreed upon 7 percent interest. However, in a scenario where Mickey defaults and the price of the apartment falls to $ 250,000, the ABC Bank certainly looses a big chunk of its investment. True to commonsense, nobody will prefer to buy this mortgage from the ABC Bank. However, ABC Bank may chose to sell this mortgage to an investor, at a price deemed satisfactory by one. This investor buys the mortgage in the hope of gaining returns on one’s investment, a possibility which may not materialize. This mortgage will then qualify to be termed a ‘toxic asset’. To put it simply, a toxic asset deviates more on the side of high risk for any investor who buys it. With the dwindling of the housing boom, many banks and financial institutions repackaged such mortgages into varied bonds to sell to the prospective investors. These toxic instruments came with a variety of names like ‘Mortgage Backed Securities’, associated with instruments like CDS (Credit Default Swap) and CDOs (Collateralized Debt Obligations) (Planet Money, 2010b). During the nascent stages of the economic slowdown, toxic assets still commanded a good reputation. Yet, the investor response dived to lukewarm, as the recession evolved into a bleak reality. However, propitious predictions regarding a possible revival of the economy have stimulated the interest of big and small investors in such toxic assets. Planet Money decided to be one such investor, by buying a toxic asset of its own that is ‘Toxie’. Scope of Toxic Assets At the zenith of the housing boom, the market for toxic assets stood at an astounding $ 3 trillion (Planet Money, 2010c). Many affluent investors like banks, pension funds and insurance companies choose to invest in toxic assets (Planet Money, 2010c). With the maturing of recession, the buyers’ interest in toxic assets started to dwindle. Even government backed up from its original plans of investing generously in toxic assets (Planet Money, 2010c). Instead, it decided to tag with private investors, to stimulate economy by purchasing only $ 40 billion worth of toxic assets (Planet Money, 2010c).As per some conservative estimates, the daily trading in toxic assets amounts to $ 500 million, a miniscule percentage of the total lot (Planet Money, 2020c). Some experts revealed as early as March 2010 that almost 41% of the loans backing Planet Money’s ‘Toxie’ were as good as dead (Planet Money, 2010c). By this time, ‘Toxie’ had brought in merely $332 on the actual investment of $ 1000 (Planet Money, 2010c). Ethical and Legal Issues Raised by Toxie The online publication of the economic saga of ‘Toxie’ in a systematic and sequential manner raised many interesting ethical and legal questions pertaining to the functioning of banks and financial institutions. One major problem pertains to the prizing and marketing of toxic assets. This was brought to fore by the New Jersey Carpenters Vacation Fund, who invested $ 100,000 in Toxie’s siblings (Planet Money, 2010d). The carpenters union decided to sue the Toxie’s procreator, Royal Bank of Scotland, after suffering a loss of $ 95,000 (Planet Money, 2010b). The suit raised fundamental questions as to who is to be blamed if a toxic fund goes down the drain, the original creator or the seller. Are the sellers of Toxie or similar toxic assets culpable, if they resort to misstatement while selling them? If yes, to what extent? The issue is basically to determine accountability at a micro level, when the system at large malfunctioned, and is positively complex and mind boggling (Johnson & Kwak, 2010). The other issue unraveled by Toxie was related to the ethical and legal propriety of the investors, who procured housing loans from the banks by extending false information and data (Planet Money, 2010d). One of the obligators, a lawyer Derek Tacca, who owed Toxie some money, defaulted on five loans amounting to $ 3.6 million, including the $ 991,000 loan backing Toxie (Planet Money, 2010d). Is a serial defaulter who resorted to lying to procure big loans is to be treated at par with a regular investor who failed to retain one’s dream home owing to financial problems? Are the existing legal instruments sufficient to assign accountability in such scenarios? Toxie also strikingly unearthed the onus of the banks and financial markets in hiding and perpetuating the due economic decline, by resorting to financial and technical machinations to make the toxic assets like Toxie look enticing (Planet Money, 2010e; Johnson & Kwak, 2010). That too while being aware that they stood on hollow foundations supported by organizational and individual greed and personal stakes (Planet Money, 2010e; Johnson & Kwak, 2010). It also made amply clear that it was the dubious intentions and practices of the people who were in charge, which enabled the fraudulent investors to swindle banks on a sustained and continual basis (Roubini & Mihm, 2010). It is astonishing that the Banks failed to detect something fishy and fraudulent in the activities of customers like Craig Adams Inc., one of the defaulters of Toxie, when the entire chain of financial deals managed by Adams and his associates could have raised the hackles of even a greenhorn financial manager (Planet Money, 2010f). Currently this Adams is under the scanner of FBI (Planet Money, 2010f). People like Adams managed to carry on with such frauds, courtesy the adamancy of the associated financial managers and administrators to withhold information and perpetuate the housing boom owing to personal interests. It also brings into shadow, the government’s effort to bail out debtors, causing immense loss to the taxpayers who have invested in toxic assets like Toxie (Bebchuk, 2009). Plight of Toxie As expected, Toxie suffered the fate of such financial instruments as are backed by dubious investments, which rely on lacunas and loopholes within the system to proceed and continue, until the system itself busts, bringing everything down with it. Eventually, Planet Money, which purchased Toxie on March 12, had to publish the obituary of Toxie as early as September 24 (Planet Money, 2010g). During its brief life, Toxie only managed to produce a return of $449, on an investment of $1000. However, the demise of Toxie was not a waste. It certainly managed to draw the public’s attention to the flaws and deficiencies existing in the existing laws and financial practices. Total Words: 1,260 References Bebchuk, Lucian A. (2009). Buying Troubled Assets. Yale Journal of Regulation, 26(2), 343. Johnson, Simon & Kwak, James. (2010). 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. New York: Pantheon. Planet Money. (2010a, March 12). We Bought a Toxic Asset: You can watch it Die. Retrieved October 15, 2010, from http://www.npr.org/templates/story/story.php?storyId=124491608 Planet Money. (2010b, April 16). Seeking a Smoking Gun in a Smoking Asset. Retrieved October 15, 2010, from http://www.npr.org/templates/story/story.php?storyId=126025456 Planet Money. (2010c, March 19). Toxic Assets Market Awaits Rebound. Retrieved October 15, 2010, from http://www.npr.org/templates/story/story.php?StoryId=124852799 Planet Money. (2010d, July 23). Inside our Toxic Asset: An 81-Year-Old Man with a Dog Named Muffin. Retrieved October 15, 2010, from http://www.npr.org/blogs/money/2010/07/22/128700329/mortgage Planet Money. (2010e, August 27). How Wall Street made the Mortgage Crisis Worse. Retrieved October 15, 2010, from http://www.npr.org/blogs/money/2010/08/26/129454550/inaside-the-sausage-factory- how-wall street-made-the-financial-crisis-worse Planet Money. (2010f, July 23). Inside our Toxic Asset, Cont’d: A $ 200 Million Mortgage Scheme. Retrieved October 15, 2010, from http://www.npr.org/blogs/money/2010/07/23/128720556/atc-flipping Planet Money. (2010g, September 24). The Friday Podcast; Toxie, R.I.P. Retrieved October 15, 2010, from http://www.npr.org/blogs/money/2010/09/23/130083071/the-friday-podcast-toxie-r-i-p Roubini, Nouriel & Mihm, Stephen (2010). Crisis Economics: A Crash Course in the Future of Finance. New York: Penguin Press HC. Read More