A study just done by two professors from Harvard and Princeton come up with the following conclusion of the toxic assets issue. The following is the closing paragraph from that study:
"This paper has investigated the pricing of investment grade credit risk during the financial crisis. Many analysts appear to be looking at large recent price changes and concluding that we must be witnessing distressed pricing and widespread market failure. This conclusion is based on intuition that fails to appreciate the extreme nonlinearity in the risks of credit securities, especially those manufactured by securitization (ie CDO traunches). Our analysis suggests that the dramatic recent widening of credit spreads is highly consistent with the decline in the equity market, the increase in its volatility, and an improved investor appreciation of the risks embedded in these securities. From this perspective, policies that attempt to prevent a widespread mark-down in the value of credit sensitive assets are likely to only delay - and perhaps only worsen - the day of reckoning."
