"Toxic asset" has become economic shorthand for the bad loans at the center of this entire mess. The most damaging of the assets are mortgage-backed investments that have threatened the very survival of the world's biggest banks. Basically they are bundles of thousands of individual mortgages. At the height of the housing boom, selling these bundles of mortgages freed banks to loan even more money. Banks, Wall Street firms and hedge funds also bought these securities as investments. But the assets have lost their value as homeowners defaulted on the mortgages, foreclosures increased and home prices dropped.
The plummeting value of the mortgage-backed investments, and other securities built around loans, has forced banks to dramatically cut back on their lending to each other, businesses and consumers. The recession will only deepen unless the banks can eventually get rid of the "toxic assets" still on their books.
In his first address to a joint session of Congress President Obama made a point out, "The concern is that if we do not re-start lending in this country, our recovery will be choked off before it even begins."
So who is willing to buy the toxic assets to allow broader bank lending again? Plenty of people, according to Sue Allon.
"I can name at least 12 hedge funds with $30 billion who are ready to start to buy them," she says.
Allon is the CEO of AllonHill. She's a veteran of the mortgage and banking business with an intelligence that becomes obvious within moments of introduction. The Denver-based company that bears her name specializes in examining toxic assets and determining their present value.
Allon's staff of more than two dozen analysts quietly toils away in open cubicles on a ground level office space just a few blocks from Coors Field. She describes it as detective work. They break down bundles of mortgage-backed investment loan by loan using a sophisticated computer program. This investigation process looks at everything from the terms of the loan to the borrower's payment history. They also examine whether the homeowner desires to stay in the home. The process takes anywhere from one to three hours per loan.
AllonHill has valued tens of thousands of loans this way since last autumn. The information is provided to clients, mostly hedge funds, who are interested in making an offer to purchase the toxic assets once banks put them up for sale. The discounted assets could pay off huge returns once the economy stabilizes.
"The industry is completely geared up and ready for this," she claims.
The problem is a lot of the banks are not. Many of these assets are now worth only 30 to 60 percent of what the banks paid for them. Allon believes the most distressed banks are reluctant to sell them because doing so would require writing down billions of dollars more in losses.
"In many cases they would be insolvent," Allon says. "In many others they wouldn't be insolvent [but] they would be in big trouble. And it would be very ugly headline, especially if they are taking money from the government. That would look very bad."
Allon figures the banks could quickly find buyers for more than $1 trillion worth of the stuff if - and it's a very big if - the banks bite the bullet and sell all their toxic assets at market value.
"I think you could move the vast majority of the loans that have a hope -- if you get to them quickly -- to get some modifications in place. I bet we could come together as an industry and move them within a matter of 90 days, 120 days."
Some believe that once trading of these securities gets underway, momentum could build quickly. There are some good assets wrapped up with bad ones which may actually recover of some of their value. A lot of money can be made. But it's unclear what it would take to convince banks to accept the steep losses that would come by selling their toxic holdings. Even if they did sell, some estimate another trillion dollars or more of the least desirable assets would remain on bank ledgers. It's hard to know how long it could take to clear those away. Of course, nobody is 100 percent certain of anything in this crisis because nothing exactly like this has happened before.
That gets us back to Varvel's "pilot" cartoon. Disposing of the toxic assets and other solutions to the financial crisis will depend on the ability of hundreds of people like Sue Allon to improvise and innovate. Making things up as you go along is not a comforting strategy for recovery. But remember that aviation cliché: any landing you can walk away from is a good landing.