There's a widening dichotomy in the way industry observers describe subprime-related financial instruments, such as those included in the financial rescue plan the Treasury Department announced yesterday: what some call "toxic," "troubled" or "dodgy" assets, others (such as the current Administration) refer to as simply "legacy" assets. They've certainly been suffering a liquidity problem and probably performance issues, but are these assets truly "toxic"? On the other hand, are they a gift, as the word "legacy" implies?"I kind of like 'devalued,'" says Emanuel Derman, a professor at Columbia University and director of its program in financial engineering, as well as the head of risk and a partner at Prisma Capital Partners, a fund of funds. "'Toxic' is a value judgment, so is 'dodgy.' 'Distressed' suggests temporariness, which is too hopeful. So I like 'devalued,' although even that, too, has a temporary, hopeful feel to it."
In a search of Google News today, the term "toxic assets" crops up 29,980 times, as in this Los Angeles Times headline: "Individuals may be able to invest in toxic assets." Sounds appealing, doesn't it? Put your retirement savings in the Toxic Growth Fund. According to my Oxford dictionary, "toxic" means "1. of poison. 2. poisonous." No one is going to brag at a cocktail party that they've put their money in poisonous investments. If the use of this term persists, the government and others trying to coax investors into buying portions of these products (as Pimco and BlackRock are said to be considering doing) will have a very tough time.
"I think 'toxic' is a strange term to use for these assets," says Richard Bookstaber, author of the book A Demon of Our Own Design, which predicted some of the current market crisis, and a former risk manager and trader at several Wall Street firms. "They are just plain assets of a particular type. There is nothing wrong with them; someone can hold them if they get them at the right price and have a reasonable holding period." "Dodgy assets" only crops up in Google News 616 times and "dodgy debt" a mere 100 times. However, British comedians John Bird and John Fortune have used these terms to good effect in their videotaped mock-interviews about the financial crisis, which have racked up more than a million page views on YouTube. The Wall Street Journal spoke of "dodgy assets" in an editorial today. My Oxford dictionary offers no definition for "dodgy," but Wiktionary defines the word as: "evasive and shifty; unsound and unreliable; dishonest; risky; deviant; weird." Hardly a lure for wary investors.
"Legacy" is the latest, most generous term being applied to subprime-related instruments (Google News has 820 references to the term today); the Oxford dictionary defines it thus: "1. gift left in a will. 2. thing handed down by a predecessor."
The Obama Administration refers to its latest financial rescue plan as "The Public-Private Investment Program for Legacy Assets." A fact sheet released yesterday by the U.S. Treasury states, "the financial system is still working against economic recovery. One major reason is the problem of 'legacy assets' - both real estate loans held directly on the books of banks ('legacy loans') and securities backed by loan portfolios ('legacy securities')." This seems to categorize any mortgage loan or security as legacy.
Derman is not in favor of this new adjective. "'Legacy' is a euphemism, which is the last thing we need," he says. But Bookstaber is on board with it. "They are 'legacy' in that they are stuck on the books and everyone is trying to get them off of bank books where they do not make sense," he says.