The US Treasury announced that they have liquidated the $225 Billion of mortgage debt acquired during the financial crisis for a profit of $25 Billion.  Much of this debt was termed “toxic” and was the source of tremendous trepidation during the worst of the crisis.  It is important to keep in mind that price is what you pay and value is what you get.

When the banks first originated these loans at the height of the real estate boom they were obviously terrible investments.  As prices dropped panic ensued, and the effects of mark to market accounting in often illiquid markets, ravaged banks balance sheets until their was a change in accounting.  Many of the banks were pressured to dispose of these assets at the bottom, missing out on the tremendous profits that were made on mortgage loans since the peak of the crisis in March of 2009.

Mark to market accounting created a self fulfilling prophecy as price declines created losses, causing banks stock prices to drop, and forcing them to raise capital at bad prices, and to divest assets at unattractive levels further pressuring the prices of the assets.  The ratings agencies continuously threw gasoline on the fire by downgrading securities originally rated AAA, to junk after discovering that the ratings agencies own internal models were faulty.  To me it was no coincidence that the bottom of the market came shortly after the accounting rules were changed in early 2009.

http://online.wsj.com/article/SB10001424052702304636404577291242152583130.html?mod=WSJ_hp_LEFTWhatsNewsCollection

INVESTING IN THE FINANCIAL MARKETS INVOLVES RISKS. OPTIONS ARE NOT SUITABLE FOR ALL INVESTORS.