The put problem with buying toxic assets

@article{Wilson2010ThePP,
  title={The put problem with buying toxic assets},
  author={Linus Wilson},
  journal={Applied Financial Economics},
  year={2010},
  volume={20},
  pages={31 - 35}
}
  • Linus Wilson
  • Published 1 January 2010
  • Business, Economics
  • Applied Financial Economics
This article uses the option pricing arguments of Merton (1974) to demonstrate that even solvent banks will be reluctant to sell volatile, toxic assets at market prices. Banks’ shareholders have insolvency puts that give them limited liability in the event of default. The insolvency puts are more valuable when the banks’ assets are more volatile. Shareholders in banks will require any buyer to pay for the lost volatility as well as the market price of the toxic assets. Thus, taxpayers must be… 

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