Saturday, November 6, 2010

Toxic Assets or Toxics as Assets

Toxic Assets or Toxics as Assets
by Pankaj Sekhsaria

The New Indian Express, 21st Oct. 2010

If there is one term that defines the tailspin the world economy experienced recently, it is ‘toxic assets’. The phenomenon has been hugely analysed and debated but little has been discussed on the coinage of the term itself. Who used it first? What was its purpose? Has it had any particular implications? Would the responses to the crisis have been different if toxic assets were called something else, say ‘legacy assets’?

It is believed that the term toxic assets was coined and popularised by the founder of Countrywide Financial, Angelo Mozilo, who used ‘toxic’ to describe certain mortgage products in early 2006: “(The 100% loan-to-value subprime loan is) the most dangerous product in existence and there can be nothing more toxic...” he is recorded as having said in an e-mail he sent in March 2006.

What is particularly intriguing here is the crossing over of ‘toxic’, from its primary usage in the environmental context into the realm of finance. This offers, both, an interesting metaphor on the one hand and an important commentary on the other.

It doesn’t need much to see the contradiction in putting toxic and assets together; it’s the ultimate oxymoron. If it’s an asset, it is positive and welcome. If it’s toxic it is best avoided, even better disposed. What does their juxtaposition in ‘toxic assets’, then imply? Is it a dichotomy of the real world or can it be dismissed merely as a play of words?

Language does not just modulate the experience of the real world, it often becomes the experience itself. It is language that we use again to change the experience, like when a new term ‘legacy assets’ was created for the purpose. Most readers are likely to have missed it earlier in this essay because it does not have the power, the influence or the history of ‘toxic assets’. ‘Legacy assets’ or ‘legacy loans’ as they are also called, were in fact, a re-branding exercise attempted by the US Treasury in March of 2009 to make more palatable and sellable what were now widely known as ‘toxic assets’. The term, however, is so firmly embedded in public memory that it has been impossible to dislodge.

‘Toxic assets’ has made the boundary between financial and environmental risks unexpectedly and visibly porous. The same was done a while ago in the climate change debate as well — in the Clean Development Mechanism (CDM), a financial instrument that offers a solution to the climate crisis by transacting in ‘carbon credits’. CDM is a politically sensitive issue; economically an uncertain one and has been seen, empirically, as rather unsuccessful so far: trade in carbon is increasing but there seems to be no commensurate reduction in carbon emissions.

The question then is this: Was the creation of trading in carbon, implicitly, an effort to ‘repackage’ a certain toxicity as an asset. That the packaging has been widely successful is evident in the growing interest in the idea. A number of developing countries including India have bought into it fully and have now created multiple scenarios of economic revenues through different forms of carbon trading.

That ‘waste is a misplaced resource’ is a commonly accepted principle. It has been shown that excretions from one system, particularly in nature, are productively used in another. For this to happen, however, the waste needs to be thrown completely out of the system first; inside it becomes toxic and extremely dangerous. This also assumes that there are clear boundaries between systems and that waste moves across these boundaries.

While carbon is an integral part of the system of the Earth, its excessive accumulation is the toxicity that threatens. This toxicity is now being promoted as an asset for a transaction that will now happen before its removal from within the system.

The irony is that the climate change crisis is built on the notion of the Earth as a single, unified entity: it doesn’t matter where and when the emissions happen or who is responsible because the consequences are to be faced by all. The problem this raises for carbon trading is evident. If the Earth is indeed one, there is no ‘other backyard’ to put the waste (carbon) into; it’s the reverse of the ‘toxics assets’ case. The argument that carbon trading will work is, then, in direct opposition to the notion that there is one Earth because carbon emissions can’t be toxic and an asset at the same time!

The options that this leaves us with are two: that the Earth is not one entity or that climate change is not a problem that we should be worrying about. Neither might be acceptable, but then it cannot be dismissed as mere word play either!

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