A GLOSSARY OF FINANCIAL TERMS
SOURCES:
A = BBC News, "The Layman's Finance Crisis Glossary" 8 April 2009.
http://news.bbc.co.uk/go/pr/fr/-/2/hi/uk._news/magazine/7642138.stm
B = "It Takes A Pillage", book by Nomi Prins. 2009. 296pp. John Wiley & Sons Inc., USA ISBN: 978-0-470-52959-1
C = "Agenda For A New Economy", book by David Korten. 2009. 196pp. Berrett-Koehler Publishers, Inc., USA. ISBN: 978-1-60509-289-8
D = "Obama's Big Sellout", article by Matt Taibbi, Rolling Stone Magazine, 10 Dec., 2009
E = American Heritage Dictionary, 4th Edition, 2000
Assets: "Things that have earning power, or some other value to their owner" (A)
fixed assets: (aka "long-term assets") Things of value that have a useful life of more than one year. For example, buildings and machinery. (A) intangible fixed assets: non-physical fixed assets, like the good reputation of a company, or a brand. (A)
current assets: "Things that can be easily turned into cash and are expected to be sold, or used up in the future" (A)
asset-backed security (ABS): "A contract that can be assigned a value and traded." Examples: a stock, a bond, a mortgage debt. (A) --In the 1980's, Wall Street "...bundled bunches of loans and sold bonds that were constructed using payments ffrom those loans." But the FDIC figured out (way too late) it couldn't understand the more complex ABSs, and there was not transparency in these transactions. (B p10) tranche: A "slice of an asset-backed security". At least two tranches, sometime dozens, of tranches per ABS. The senior tranche is the preferred one: it receives any interest payments coming from the underlying loans first. The bottom slice ("sub-tranche") protects the senior one from not receiving any interest payments if the borrowers default on their loans. Since they take the hit of any losses, the sub-tranche holeder get higher interest that the senior tranche holders. But when defaults are too massive for the sub-tranches, the whole security collapses, not just the sub-tranches. (B pp.54-55)
bond: A debt security, an IOU. The bond states when a loan must be repaid, and what interest the borrower (the issuer of the bond) must pay the holder (who purchased the bond). --Both banks and investors buy and trade bonds. A junk bond has a high rate of interest to reward the investor for a high risk of failure. More politely called a "high-yield bond". A) In the current (2010) economic collapse, it's been discovered that many CDOs were basically composed of junk bonds.
capital: The wealth (cash or other assets) used for the creation of more wealth. In a company, it's often called working capital, or fixed capital. (A)
chapter 11: A U.S.A. term for bankruptcy protection. It postpones a company's obligations to its creditors, so the company has time to reorganize its debts, or sell parts of the business.
collateralized debt obligation ("CDO"): An exotic, relatively new, often very complex tradeable financial security. A rescrambled mix of individual loans such as sub-prime loans backed by homes, or bonds, or unregulated credit derivatives, or other assets. "...Fabricated assets...concocted from a little bit of reality, and alot of fakery, whose value is backed by loans and promises rendered by a chain of interested parties in finance." (B pp11-13) --The extremely risky CDO market went from almost zero in 1996 to a $2 trillion global disaster by 2008, when proceeds fell 88 per cent to $52.6 billion. (B pp57-58) ---For example, U.S. taxpayers bailed out Citigroup (megabank) to the tune of $306 billion in 2008, much of it to cover massive Citigroup investments in toxic mortgage-backed CDOs. (D pp2-3). --Goldman Sachs in 2007 created tons of risky CDOs which they sold to clients while, at the same time, they were busy selling their own similar toxic assets to get them off their books. Goldman Sachs also bet $4 billion in 2007 these kinds of assets (which they were selling) would fail. (B p84)
commercial banks/investment banks: Commercial banks deal with public deposits and loans. Investment banks deal with speculative (more risky) trading activities, corporate mergers and acquisitions. (B p140) The Glass-Steagall Act of 1933 in the U.S.A. made it illegal for one bank to be both a commercial, and an investment bank. (It thus prohibited public deposits and loans being used as collateral for any upside-down pyramid of risky investment securities.) It was a major government response to the irresponsible specualtion by investment banks which had led to years of economic depression in the 1930's. --Led by Robert Rubin (a former Goldman Sachs co-chairman and President Clinton's Treasury Secretary), Senator Phil Gramm, and others, Glass-Steagall was repealed in 1999. (B pp141-142) The ensuing deregulation led to the dominance of a feew "supermarket" commercial banks which used their customers' collateral for unregulated, risky investments. It also led to the biggest investment-only banks to get the SEC net capital rule of 1975 (a bank can't borrow more than $12 worth of debt for every one dollar of real capital) gutted in 2004, so that the leverage was increased from twelve to one, to thirty to one. These two major deregulations played a major part in leading to the banking collapse and triggered economic disasters of 2008 and following. (B pp133-147) Ensuing was the extremely expensive ($13 trillion, from the Federal Reserve, the Treasury Department, and the FDIC) public bailout of the financial industry, while leaving dangerous banking and investment structures and practices intact. (B p5)
commodities: 'Products that are, in their basic form, all the same. So it makes little difference from whom you buy them.' Examples: raw material such as gas, oil, gold, corn. They have a market price. You would be unlikely to pay more for ironore from one mine or another. (A)
credit default swap (CDS): " A swap designed to transfer credit risk, in effect a form of financial insurance. The buyer of the swap makes periodic payments to the seller in return for protection in the event of a dfault on a loan." (A) --For instance, Deutsche Bank purchased lots of CDSs from AIG to protect themselves in case the very risky mortgage backed CDOs they owned went bad. They did, and AIG paid them $1.8 billion (with U.S. taxpayer bailout dollars) (B p62) ---The CDS was invented in 1997 by JP Morgan Chase. The CDS market has not been regulated to date. "Since 2000, the CDS market has exploded from $900 billlion to $45.5 trillion in 2009" (about twice the size of the entire U.S. stock market). When the liquidity in markets dried up (as with housing price collapses) in 2009, lenders called in their money. A major seller of CDSs, AIG (American International Group) almost went bankrupt, but was bailed out by the U.S. government (taxpayers) a total of about $182 billion. (B pp186-191) CDSs "involve bets and counter-bets that may partially cancel each other out if anyone can untangle them---but many of the parties to them have already [2009] gone bankrupt. Because the transactions were never reported to any central clearinghouse, and many of them are carried off the books of the institutions that hold them, no one really knows how much is really at risk, or who owes what to whom." (C p67)
derivatives:"A way of investing in a particular product or security without having to own it. The value can depend on anything from the price of coffee, to interest rates, or what the weather is like." (A) They have no intrinsic value (unlike owning part of a car company, or a share in a farm, or a house). "Derivatives can be used as insurance to limit the risk of a particular investment." (A) credit derivatives (such as CDSs) "are based on the risk of borrowers defaulting on their loans, such as mortgages." (A)
equity: "In a business, equity is how much all of the shares put together are worth. In a house, your equity is the amount your house is worth [at any given time] minus the amount of mortgatge debt [at that time]." (A)
Federal Reserve System:" A U.S. banking system that consists of 12 federal reserve banks, with each serving member banks in its own district. This system, supervised by the Federal Reserve Board [select elite bankers] has broad regulatory powers over the money supply and the credit structure." (E) It also regulates and supervises its member banks. It tries to maintain stability in the economy by keeping the supply of moneyand the availability of credit balanced." 'The Fed' "operates to achieve maximum employment, stable prices, and moderate long-term interest rates. Its principle tool is "printing" money, a process in which the Fed attempts to expand the economy by making "cash for lending available by buying bank securities. The Fed also regulates banks by setting and maintaining minimum reserve and capital levels." Its major failure at regulation led to the banking collapse beginning in 2008. (B p113)
futures:"A futures contract is an agreemnt to buy or sell a commodity at a predetermined date and price. It could be used to hedge or speculate on the price of the commodity." (A) --Example: If you think corn will go way up in price in 6 months, you could purchase a six-month corn futures contract for a guaranteed price six months down the road. If the actual price in six months is higher, you make money. If it turns out lower than the price of your contract, you lose money.
GDP (Gross Domestic Product): A measure of economic activity ina country, the total market value of all goods and services. (A) Author David Korten states that currently the GDP substantially reflects corporate profits, rather than real social and environmental wealth, the health of people and nature. "The use of GDP as a postive measure of economic performance is actually destructive because it leads to policies that promote the growth of phantom [unsustainable, essentially unproductive] wealth at the expense of real social and environmental wealth." (C pp121-123)
hedge fund: "A private investment fund with a large, unregulated pool of capital and very experienced investors. Hedge funds use a raqnge of sophisticated strategies to maximize returns---including hedging (making an investment to reduce the risk of price fluctuations to the value of an asset), leveraging, and derivatives trading" (A) "A standard hedge fund takes in money or assets and promises to use them to provide a handsome return for the investor through various bets---on housing, oil, weather, whatever. Hedge fund managers make fees typically 2% management fees, based on these returns, and the volume of assets they have under management, plus 20% [!!] performance fees. Hedge funds borrow money against these assets from commercial and investment banks to make even bigger speculative wagers. The thinking goes: the more you be right, the more money you make. The operative word here is more." (B p102) "...Hedge fund managers don't even let the experts know how much they borrow, using whatever assets they have as collateral...the government has never required this information." In 2007, the total assets under hedge fund management reached $1.87 trillion. This management is unregulated and, moreover, the leverage behind these assets is secret. And hedge funds enjoy special tax advantages, "...such as paying the IRS at the capital gains rate of 15%, instead of the normal person or coporate rate of 35% of the profits." (B pp12-13)
leveraging: Using debt to supplement investment . Borrowing alot of money to purchase a big bet, using your collateral which is just a fraction of the investment, or bet, you purchase. The smaller that fraction, the more highly leveraged you are. (A) The recent economic collapse was made more severe with a thrity-to-one leverage ration for investment banks. (B p43)
Libor: London Inter Bank Offered Rate. The rate at which banks lend money to each other.
liquidity:"The liquidity of something is how easy it is to convert into cash." For example, your bank account is more liquid than your house. (If you had to sell your house very quickly, you would likely ha ve to drop the price to convert it into case.) (A)
mortgage-back security (MBS): "Securities made up of mortgage debt, or a collection of mortgages. Banks repackage debt from a number of mortgages, which can then be traded. Selling mortgages off frees up funds to lend to more homeowners." (A) "During the Second Great Bank Depression [2008] securities themselves were a much bigger problem themselves than the [mortgage] loans...toxic assets are not the same as defaulted sub-prime mortgage loans; loans are merely one of the ingredients that make up the ssets. All the sub-prime loans in existence could have defaulted and the homes attached to these could have been devalued to zero (which didn't happen), but without the feat of securitization, the banks would not have become nearly insolvent. Toxic assets became devoid of value, not because all the sub-prime loans stuffed inside them tanked, but because there was no longer demand from investors." (B pp44-46)
Ponzi scheme: "Similar to a pyramid scheme, an enterprise where---instead of genuine profits---funds from new investors are used to pay high returns to current investors. Named after the Italian fraudster Charles Ponzi, such schemes are destined to collapse as soon as investment tails off, or significant numbers of investors simultaneously wish to withdraw funds." (A) The creation of money by banks through debt (interest-bearing loans to their customers) has been described as a gigantic Ponzi scheme. Money can alternatively be created go vernment sponsoring a wide variety of public works projects. (described in the animated documentary film, "Money As Debt")
prime rate: "A term used primarily in North America to describe the standard lending rate of banks to [their best] customers. The prime rate is usually the same across all banks, and higher rates are often described as "percentage points above prime". (A)
rating: "Banks are rated according to their safety from an investment standpoint---based on the ability of the company or government that has issued it to repay. Ratings range from AAA, the safest, down to D, a company that has already defaulted." (A) The major rating agencies (including Standard and Poor's, Moody's Investor Service, and Fitch Ratings) were paid fees (dollar amount kept secret) by the companies who wanted high favorable ratings on their offerings. These rating agencies issued phony high ratings to spur demand for many risky bonds, which contributed to the global economic meltdown when the bonds failed. (B pp58-60)
retained earnings: "Money not paid out as dividends, and held awaiting investment in the company". (A)
securitization: "Turning something into a security. For example, taking the debt from a number of mortgages and combining them to make a financial product, which can be traded." (A)
short selling: "A technique used by investors who think the price of an asset, such as shares, currencies, or oil contracts, will fall. They borrow the asset from another investor and then sell it in the relevant market. The aim is to buy back the asset at a lower price and return it to the owner, pocketing the difference." (A)
stagflation: "The dreaded combination of inflation and stagnation---an economy that is not growing while prices continue to rise." (A)
structured investment vehicle (SIV): A way to hide debt legally, "off-the-books hiding places to take on debt with holding extra cash against the debt [and borrowing money against it]. SIVs, particularly at the large supermarket commercial banks such as Citigroup, became convenient places to conceal the true wealth of the banks. SIVs became part of the reason Citigroup had more than a trillion dollars of risky assets off its books." (B p10).
subprime mortgages: "Mortgages that carry a higher risk to the lender (and therefore tend to be at higher interest rates) because they are offered to people who have had financial problems, or who have low or unpredictable incomes" (A) Wall Street and the megabanks promoted and misrepresented risky and falsely rated investments to their customers, making outrageous profits with high fees, then repackaging the subprime mortgages into more complex products (and selling those to other unsuspecting investors). When the bubble predictably burst, those investors were left holding the bag. These mortgages were a significant contribution to the economic collapse.
swap: "An exchange of securities between two parties. For example, if a firm in one country has a lower fixed interest rate, and another country has a lower floating interest rate, an interest rate, an interest rate swap could be mutually beneficial ." (A)
toxic debts: "Debts that are very unlikely to be recovered from borrowers. Most lenders expect that some customers cannot repay; toxic debt describes a whole package of loans where it is unlikely that it will be repaid." (A)
*******
David Korten suggests you take heart: “Nobody seems to fully understand it. The accounting involves so much smoke and mirrors it may be beyond understanding…I’ve learned to recognize a system that has delinked from reality and is operating with no one at the helm. Furthermore, I have learned that when folks are moving around trillions of dollars in secret transactions and cannot explain in a credible way where the money is coming from and where it is going, and cannot make a credible case that it is serving a beneficial purpose, they are probably up to no good. In the end, we don’t need to know the details to know that Wall Street collapsed because of fatal design flaws in a financial system that needs to be replaced with a system designed to serve the public and assure accountability.” (C p68). ***** (2010) *****
A = BBC News, "The Layman's Finance Crisis Glossary" 8 April 2009.
http://news.bbc.co.uk/go/pr/fr/-/2/hi/uk._news/magazine/7642138.stm
B = "It Takes A Pillage", book by Nomi Prins. 2009. 296pp. John Wiley & Sons Inc., USA ISBN: 978-0-470-52959-1
C = "Agenda For A New Economy", book by David Korten. 2009. 196pp. Berrett-Koehler Publishers, Inc., USA. ISBN: 978-1-60509-289-8
D = "Obama's Big Sellout", article by Matt Taibbi, Rolling Stone Magazine, 10 Dec., 2009
E = American Heritage Dictionary, 4th Edition, 2000
Assets: "Things that have earning power, or some other value to their owner" (A)
fixed assets: (aka "long-term assets") Things of value that have a useful life of more than one year. For example, buildings and machinery. (A) intangible fixed assets: non-physical fixed assets, like the good reputation of a company, or a brand. (A)
current assets: "Things that can be easily turned into cash and are expected to be sold, or used up in the future" (A)
asset-backed security (ABS): "A contract that can be assigned a value and traded." Examples: a stock, a bond, a mortgage debt. (A) --In the 1980's, Wall Street "...bundled bunches of loans and sold bonds that were constructed using payments ffrom those loans." But the FDIC figured out (way too late) it couldn't understand the more complex ABSs, and there was not transparency in these transactions. (B p10) tranche: A "slice of an asset-backed security". At least two tranches, sometime dozens, of tranches per ABS. The senior tranche is the preferred one: it receives any interest payments coming from the underlying loans first. The bottom slice ("sub-tranche") protects the senior one from not receiving any interest payments if the borrowers default on their loans. Since they take the hit of any losses, the sub-tranche holeder get higher interest that the senior tranche holders. But when defaults are too massive for the sub-tranches, the whole security collapses, not just the sub-tranches. (B pp.54-55)
bond: A debt security, an IOU. The bond states when a loan must be repaid, and what interest the borrower (the issuer of the bond) must pay the holder (who purchased the bond). --Both banks and investors buy and trade bonds. A junk bond has a high rate of interest to reward the investor for a high risk of failure. More politely called a "high-yield bond". A) In the current (2010) economic collapse, it's been discovered that many CDOs were basically composed of junk bonds.
capital: The wealth (cash or other assets) used for the creation of more wealth. In a company, it's often called working capital, or fixed capital. (A)
chapter 11: A U.S.A. term for bankruptcy protection. It postpones a company's obligations to its creditors, so the company has time to reorganize its debts, or sell parts of the business.
collateralized debt obligation ("CDO"): An exotic, relatively new, often very complex tradeable financial security. A rescrambled mix of individual loans such as sub-prime loans backed by homes, or bonds, or unregulated credit derivatives, or other assets. "...Fabricated assets...concocted from a little bit of reality, and alot of fakery, whose value is backed by loans and promises rendered by a chain of interested parties in finance." (B pp11-13) --The extremely risky CDO market went from almost zero in 1996 to a $2 trillion global disaster by 2008, when proceeds fell 88 per cent to $52.6 billion. (B pp57-58) ---For example, U.S. taxpayers bailed out Citigroup (megabank) to the tune of $306 billion in 2008, much of it to cover massive Citigroup investments in toxic mortgage-backed CDOs. (D pp2-3). --Goldman Sachs in 2007 created tons of risky CDOs which they sold to clients while, at the same time, they were busy selling their own similar toxic assets to get them off their books. Goldman Sachs also bet $4 billion in 2007 these kinds of assets (which they were selling) would fail. (B p84)
commercial banks/investment banks: Commercial banks deal with public deposits and loans. Investment banks deal with speculative (more risky) trading activities, corporate mergers and acquisitions. (B p140) The Glass-Steagall Act of 1933 in the U.S.A. made it illegal for one bank to be both a commercial, and an investment bank. (It thus prohibited public deposits and loans being used as collateral for any upside-down pyramid of risky investment securities.) It was a major government response to the irresponsible specualtion by investment banks which had led to years of economic depression in the 1930's. --Led by Robert Rubin (a former Goldman Sachs co-chairman and President Clinton's Treasury Secretary), Senator Phil Gramm, and others, Glass-Steagall was repealed in 1999. (B pp141-142) The ensuing deregulation led to the dominance of a feew "supermarket" commercial banks which used their customers' collateral for unregulated, risky investments. It also led to the biggest investment-only banks to get the SEC net capital rule of 1975 (a bank can't borrow more than $12 worth of debt for every one dollar of real capital) gutted in 2004, so that the leverage was increased from twelve to one, to thirty to one. These two major deregulations played a major part in leading to the banking collapse and triggered economic disasters of 2008 and following. (B pp133-147) Ensuing was the extremely expensive ($13 trillion, from the Federal Reserve, the Treasury Department, and the FDIC) public bailout of the financial industry, while leaving dangerous banking and investment structures and practices intact. (B p5)
commodities: 'Products that are, in their basic form, all the same. So it makes little difference from whom you buy them.' Examples: raw material such as gas, oil, gold, corn. They have a market price. You would be unlikely to pay more for ironore from one mine or another. (A)
credit default swap (CDS): " A swap designed to transfer credit risk, in effect a form of financial insurance. The buyer of the swap makes periodic payments to the seller in return for protection in the event of a dfault on a loan." (A) --For instance, Deutsche Bank purchased lots of CDSs from AIG to protect themselves in case the very risky mortgage backed CDOs they owned went bad. They did, and AIG paid them $1.8 billion (with U.S. taxpayer bailout dollars) (B p62) ---The CDS was invented in 1997 by JP Morgan Chase. The CDS market has not been regulated to date. "Since 2000, the CDS market has exploded from $900 billlion to $45.5 trillion in 2009" (about twice the size of the entire U.S. stock market). When the liquidity in markets dried up (as with housing price collapses) in 2009, lenders called in their money. A major seller of CDSs, AIG (American International Group) almost went bankrupt, but was bailed out by the U.S. government (taxpayers) a total of about $182 billion. (B pp186-191) CDSs "involve bets and counter-bets that may partially cancel each other out if anyone can untangle them---but many of the parties to them have already [2009] gone bankrupt. Because the transactions were never reported to any central clearinghouse, and many of them are carried off the books of the institutions that hold them, no one really knows how much is really at risk, or who owes what to whom." (C p67)
derivatives:"A way of investing in a particular product or security without having to own it. The value can depend on anything from the price of coffee, to interest rates, or what the weather is like." (A) They have no intrinsic value (unlike owning part of a car company, or a share in a farm, or a house). "Derivatives can be used as insurance to limit the risk of a particular investment." (A) credit derivatives (such as CDSs) "are based on the risk of borrowers defaulting on their loans, such as mortgages." (A)
equity: "In a business, equity is how much all of the shares put together are worth. In a house, your equity is the amount your house is worth [at any given time] minus the amount of mortgatge debt [at that time]." (A)
Federal Reserve System:" A U.S. banking system that consists of 12 federal reserve banks, with each serving member banks in its own district. This system, supervised by the Federal Reserve Board [select elite bankers] has broad regulatory powers over the money supply and the credit structure." (E) It also regulates and supervises its member banks. It tries to maintain stability in the economy by keeping the supply of moneyand the availability of credit balanced." 'The Fed' "operates to achieve maximum employment, stable prices, and moderate long-term interest rates. Its principle tool is "printing" money, a process in which the Fed attempts to expand the economy by making "cash for lending available by buying bank securities. The Fed also regulates banks by setting and maintaining minimum reserve and capital levels." Its major failure at regulation led to the banking collapse beginning in 2008. (B p113)
futures:"A futures contract is an agreemnt to buy or sell a commodity at a predetermined date and price. It could be used to hedge or speculate on the price of the commodity." (A) --Example: If you think corn will go way up in price in 6 months, you could purchase a six-month corn futures contract for a guaranteed price six months down the road. If the actual price in six months is higher, you make money. If it turns out lower than the price of your contract, you lose money.
GDP (Gross Domestic Product): A measure of economic activity ina country, the total market value of all goods and services. (A) Author David Korten states that currently the GDP substantially reflects corporate profits, rather than real social and environmental wealth, the health of people and nature. "The use of GDP as a postive measure of economic performance is actually destructive because it leads to policies that promote the growth of phantom [unsustainable, essentially unproductive] wealth at the expense of real social and environmental wealth." (C pp121-123)
hedge fund: "A private investment fund with a large, unregulated pool of capital and very experienced investors. Hedge funds use a raqnge of sophisticated strategies to maximize returns---including hedging (making an investment to reduce the risk of price fluctuations to the value of an asset), leveraging, and derivatives trading" (A) "A standard hedge fund takes in money or assets and promises to use them to provide a handsome return for the investor through various bets---on housing, oil, weather, whatever. Hedge fund managers make fees typically 2% management fees, based on these returns, and the volume of assets they have under management, plus 20% [!!] performance fees. Hedge funds borrow money against these assets from commercial and investment banks to make even bigger speculative wagers. The thinking goes: the more you be right, the more money you make. The operative word here is more." (B p102) "...Hedge fund managers don't even let the experts know how much they borrow, using whatever assets they have as collateral...the government has never required this information." In 2007, the total assets under hedge fund management reached $1.87 trillion. This management is unregulated and, moreover, the leverage behind these assets is secret. And hedge funds enjoy special tax advantages, "...such as paying the IRS at the capital gains rate of 15%, instead of the normal person or coporate rate of 35% of the profits." (B pp12-13)
leveraging: Using debt to supplement investment . Borrowing alot of money to purchase a big bet, using your collateral which is just a fraction of the investment, or bet, you purchase. The smaller that fraction, the more highly leveraged you are. (A) The recent economic collapse was made more severe with a thrity-to-one leverage ration for investment banks. (B p43)
Libor: London Inter Bank Offered Rate. The rate at which banks lend money to each other.
liquidity:"The liquidity of something is how easy it is to convert into cash." For example, your bank account is more liquid than your house. (If you had to sell your house very quickly, you would likely ha ve to drop the price to convert it into case.) (A)
mortgage-back security (MBS): "Securities made up of mortgage debt, or a collection of mortgages. Banks repackage debt from a number of mortgages, which can then be traded. Selling mortgages off frees up funds to lend to more homeowners." (A) "During the Second Great Bank Depression [2008] securities themselves were a much bigger problem themselves than the [mortgage] loans...toxic assets are not the same as defaulted sub-prime mortgage loans; loans are merely one of the ingredients that make up the ssets. All the sub-prime loans in existence could have defaulted and the homes attached to these could have been devalued to zero (which didn't happen), but without the feat of securitization, the banks would not have become nearly insolvent. Toxic assets became devoid of value, not because all the sub-prime loans stuffed inside them tanked, but because there was no longer demand from investors." (B pp44-46)
Ponzi scheme: "Similar to a pyramid scheme, an enterprise where---instead of genuine profits---funds from new investors are used to pay high returns to current investors. Named after the Italian fraudster Charles Ponzi, such schemes are destined to collapse as soon as investment tails off, or significant numbers of investors simultaneously wish to withdraw funds." (A) The creation of money by banks through debt (interest-bearing loans to their customers) has been described as a gigantic Ponzi scheme. Money can alternatively be created go vernment sponsoring a wide variety of public works projects. (described in the animated documentary film, "Money As Debt")
prime rate: "A term used primarily in North America to describe the standard lending rate of banks to [their best] customers. The prime rate is usually the same across all banks, and higher rates are often described as "percentage points above prime". (A)
rating: "Banks are rated according to their safety from an investment standpoint---based on the ability of the company or government that has issued it to repay. Ratings range from AAA, the safest, down to D, a company that has already defaulted." (A) The major rating agencies (including Standard and Poor's, Moody's Investor Service, and Fitch Ratings) were paid fees (dollar amount kept secret) by the companies who wanted high favorable ratings on their offerings. These rating agencies issued phony high ratings to spur demand for many risky bonds, which contributed to the global economic meltdown when the bonds failed. (B pp58-60)
retained earnings: "Money not paid out as dividends, and held awaiting investment in the company". (A)
securitization: "Turning something into a security. For example, taking the debt from a number of mortgages and combining them to make a financial product, which can be traded." (A)
short selling: "A technique used by investors who think the price of an asset, such as shares, currencies, or oil contracts, will fall. They borrow the asset from another investor and then sell it in the relevant market. The aim is to buy back the asset at a lower price and return it to the owner, pocketing the difference." (A)
stagflation: "The dreaded combination of inflation and stagnation---an economy that is not growing while prices continue to rise." (A)
structured investment vehicle (SIV): A way to hide debt legally, "off-the-books hiding places to take on debt with holding extra cash against the debt [and borrowing money against it]. SIVs, particularly at the large supermarket commercial banks such as Citigroup, became convenient places to conceal the true wealth of the banks. SIVs became part of the reason Citigroup had more than a trillion dollars of risky assets off its books." (B p10).
subprime mortgages: "Mortgages that carry a higher risk to the lender (and therefore tend to be at higher interest rates) because they are offered to people who have had financial problems, or who have low or unpredictable incomes" (A) Wall Street and the megabanks promoted and misrepresented risky and falsely rated investments to their customers, making outrageous profits with high fees, then repackaging the subprime mortgages into more complex products (and selling those to other unsuspecting investors). When the bubble predictably burst, those investors were left holding the bag. These mortgages were a significant contribution to the economic collapse.
swap: "An exchange of securities between two parties. For example, if a firm in one country has a lower fixed interest rate, and another country has a lower floating interest rate, an interest rate, an interest rate swap could be mutually beneficial ." (A)
toxic debts: "Debts that are very unlikely to be recovered from borrowers. Most lenders expect that some customers cannot repay; toxic debt describes a whole package of loans where it is unlikely that it will be repaid." (A)
*******
David Korten suggests you take heart: “Nobody seems to fully understand it. The accounting involves so much smoke and mirrors it may be beyond understanding…I’ve learned to recognize a system that has delinked from reality and is operating with no one at the helm. Furthermore, I have learned that when folks are moving around trillions of dollars in secret transactions and cannot explain in a credible way where the money is coming from and where it is going, and cannot make a credible case that it is serving a beneficial purpose, they are probably up to no good. In the end, we don’t need to know the details to know that Wall Street collapsed because of fatal design flaws in a financial system that needs to be replaced with a system designed to serve the public and assure accountability.” (C p68). ***** (2010) *****
