toxic waste

noun

Definition of toxic waste

: unwanted chemicals that are the result of manufacturing or industry and that are poisonous to living things The company was fined for dumping toxic waste into the river. toxic waste dumps/sites Toxic wastes were detected in the soil samples.

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toxic waste

noun

Financial Definition of toxic waste

What It Is

Toxic waste is an idiomatic expression referring to high-risk assets with reputedly low liquidity.

How It Works

Named in reference to the hazardous byproducts of industrial processes, toxic waste frequently describes the riskiest tranches of many collateralized mortgage obligation mortgage obligations (CMOs). In an effort to provide investors with lower-risk issues of CMOs, issuers (mainly banks) inadvertently create toxic waste classes (tranches) which bear the risk eliminated from the former. Issuers accomplish this by packaging together remaining undesirable high-risk mortgage receivables. Such receivables bear little, if any, liquidity, and there is often little information available to investors.

Why It Matters

Toxic waste tranches are discernible by their heavily-discounted face value and low transparency vis-a-vis their composition. Investors avoid toxic waste securities because, similar to the environmental impact of actual toxic waste, the securities can be detrimental to the financial viability of a portfolio.

Source: Investing Answers

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