Editing High-yield debt (section)

=== Debt repackaging and subprime crisis ===
High-yield bonds can also be repackaged into [[collateralized debt obligation]]s (CDO), thereby raising the [[credit rating]] of the senior [[tranche]]s above the rating of the original debt. The senior tranches of high-yield CDOs can thus meet the minimum credit rating requirements of pension funds and other institutional investors despite the significant risk in the original high-yield debt.
[[Image:Lehman Brothers Times Square by David Shankbone.jpg|thumb|The New York City headquarters of Barclays (formerly Lehman Brothers, as shown in the picture). In background, the [[AXA Center]], headquarters of [[AXA]], first worldwide insurance company.]]
When such CDOs are backed by assets of dubious value, such as [[subprime mortgage]] loans, and lose [[market liquidity]], the bonds and their derivatives become what is referred to as "toxic debt". Holding such "toxic" assets led to the demise of several [[investment bank]]s such as [[Lehman Brothers]] and other financial institutions during the [[subprime mortgage crisis]] of 2007–09 and led the US Treasury to seek congressional appropriations to buy those assets in September 2008 to prevent a systemic crisis of the banks.<ref>{{cite news| url = https://www.telegraph.co.uk/finance/financialcrisis/6173145/The-collapse-of-Lehman-Brothers.html| archive-url = https://web.archive.org/web/20110309203357/http://www.telegraph.co.uk/finance/financialcrisis/6173145/The-collapse-of-Lehman-Brothers.html| url-status = dead| archive-date = 9 March 2011|title= The collapse of Lehman Brothers|newspaper=[[The Daily Telegraph]]|access-date= 1 August 2014}}</ref>

Such assets represent a serious problem for purchasers because of their complexity. Having been repackaged perhaps several times, it is difficult and time-consuming for [[auditor]]s and accountants to determine their true value. As the [[recession]] of 2008–09 hit, their value decreased further as more debtors defaulted, so they represented a rapidly [[depreciating asset]]. Even those assets that might have gone up in value in the long-term depreciated rapidly, quickly becoming "toxic" for the banks that held them.<ref>{{cite web|url=http://marketplace.publicradio.org/videos/whiteboard/toxic_assets.shtml |archive-url=https://archive.today/20120711085336/http://marketplace.publicradio.org/videos/whiteboard/toxic_assets.shtml |url-status=dead |archive-date=11 July 2012 |title=Marketplace Whiteboard: Toxic assets |publisher=[[Marketplace]] |access-date=20 March 2009 }}</ref> [[Toxic asset]]s, by increasing the variance of banks' assets, can turn otherwise healthy institutions into [[Zombie bank|zombies]]. Potentially insolvent banks made too few good loans creating a [[debt overhang]] problem.<ref>{{Cite journal |last=Wilson |first=Linus |date=2 February 2009 |title=Debt Overhang and Bank Bailouts |journal= |publisher=SSRN |doi=10.2139/ssrn.1336288 |s2cid=153681120 |ssrn=1336288}}</ref> Alternatively, potentially insolvent banks with toxic assets sought out very risky speculative loans to shift risk onto their depositors and other creditors.<ref>{{cite journal |last1=Wilson |first1=Linus |last2=Wu |first2=Yan Wendy |title=Common (stock) sense about risk-shifting and bank bailouts |journal=Financial Markets and Portfolio Management |date=2010 |volume=24 |issue=1 |pages=3–29 |doi=10.1007/s11408-009-0125-y|ssrn=1321666 |s2cid=153441066 }}</ref>

On 23 March 2009, U.S. Treasury Secretary [[Timothy Geithner]] announced a [[Public–private partnership|Public-Private Investment Partnership]] (PPIP) to buy toxic assets from banks' balance sheets. The major stock market indices in the United States rallied on the day of the announcement rising by over six percent with the shares of bank stocks leading the way.<ref name='Edmund L. Andrews and Eric Dash'>
{{cite news | title= U.S. Expands Plan to Buy Banks' Troubled Assets | date= 24 March 2009 | newspaper= New York Times | url = https://www.nytimes.com/2009/03/24/business/economy/24bailout.html | access-date = 12 February 2009 | first1=Edmund L. | last1=Andrews | first2=Eric | last2=Dash}}</ref> PPIP has two primary programs. The Legacy Loans Program will attempt to buy residential loans from banks' balance sheets. The [[Federal Deposit Insurance Corporation]] will provide non-recourse loan guarantees for up to 85 percent of the purchase price of legacy loans. Private sector asset managers and the U.S. Treasury will provide the remaining assets. The second program is called the legacy securities program which will buy mortgage backed securities (RMBS) that were originally rated AAA and commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) which are rated AAA. The funds will come in many instances in equal parts from the U.S. Treasury's [[Troubled Asset Relief Program]] monies, private investors, and from loans from the Federal Reserve's [[Term Asset-Backed Securities Loan Facility|Term Asset Lending Facility]] (TALF). The initial size of the Public Private Investment Partnership is projected to be $500 billion.<ref>{{cite web |url=http://www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf |title=FACT SHEET PUBLIC-PRIVATE INVESTMENT PROGRAM |publisher=U.S. Treasury |date=23 March 2009 |access-date=26 March 2009 |archive-url=https://web.archive.org/web/20090324012024/http://www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf |archive-date=24 March 2009 |url-status=dead }}</ref> Nobel Prize–winning economist [[Paul Krugman]] has been very critical of this program arguing the non-recourse loans lead to a hidden subsidy that will be split by asset managers, banks' shareholders and creditors.<ref>{{cite news|author=Paul Krugman|url=https://krugman.blogs.nytimes.com/2009/03/23/geithner-plan-arithmetic/ |title=Geithner plan arithmetic|newspaper=New York Times |date=23 March 2009 |access-date=27 March 2009}}</ref> Banking analyst [[Meredith Whitney]] argues that banks will not sell bad assets at fair market values because they are reluctant to take asset write downs.<ref name='John Carney'>
{{cite news | title= Meredith Whitney: A Bad Bank Won't Save Banks | date= 29 January 2009 | publisher= businessinsider.com | url = http://www.businessinsider.com/2009/1/meredith-whitney-a-bad-bank-wont-save-us | access-date = 27 March 2009 }}</ref> Removing toxic assets would also reduce the volatility of banks' stock prices. Because stock is akin to a [[call option]] on a firm's assets, this lost [[Volatility (finance)|volatility]] will hurt the stock price of distressed banks. Therefore, such banks will only sell toxic assets at above market prices.<ref>{{cite journal |last1=Wilson |first1=Linus |title=The put problem with buying toxic assets |journal=Applied Financial Economics |date=January 2010 |volume=20 |issue=1–2 |pages=31–35 |doi=10.1080/09603100903262954|ssrn=1343625|s2cid=218640283 }}</ref>