I think the term toxic comes from the idea that you can be damaged by being in contact with one. CDSs and CDOs are contracts that carry cash flows in both dire

I think the term toxic comes from the idea that you can be damaged by being in contact with one. CDSs and CDOs are contracts that carry cash flows in both directions. When you sell a CDS you receive the premium, but if there is a credit event you have to pay out way more than the premium. If you sold one in the good times you'd now be stuck with a contact to payout a whole load of money an no way to sell it off. For a CDO you have a similar upside and downside, but it's a bit more complex. You can be in the position where your cotract exposes you to alot of risk, and no matter how cheap you make it no one wants to buy it. That's a toxic asset.