A
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) – created by the Federal Reserve in September 2008 to support the then-frozen commercial paper market.
Asset-backed securities (ABS) – the securities created by packaging consumer and business loans with underlying assets created from car, credit card and student loans.
Auction rate securities (ARS) – these structured finance vehicles were long-term debt issued by states, cities and other credit-worthy organizations at short-term rates. The debt was bought and sold in weekly auctions.
B
Bank – there are two types discussed in this book, a "regular bank," whose deposits are insured by the FDIC and so the bank is subject to specific FDIC and other state and federal regulations; and "investment banks," which generally do not take deposits or have FDIC insurance and so are subject to different regulations by the SEC and the Fed.
Bankruptcy (BK) – when a company (or person) legally declares it doesn't have enough money or assets to pay its debts.
Broke the buck – $1 invested in money market mutual funds historically keep that $1 value; when it doesn't, as happened to one fund in September 2008, it's called "breaking the buck."
Broker-dealer – firms that broker, i.e. sell, securities to customers and also trade, i.e. deal, securities for their own account.
C
Capital – the funds invested in a bank that are available to absorb loan losses or other problems, and the funds invested in company, as equity or sometimes as debt.
Capital Purchase Program (CPP) – announced by Treasury in October 2008 when credit conditions kept getting worse and the initial plan to purchase troubled assets seemed insufficient or quick enough to calm markets. The CPP used TARP funds authorized under the Emergency Economic Stabilization Act.
Capital requirements – regulators require banks to keep a certain amount of capital on reserve as a cushion against bad loans and customer withdrawals.
Central banks – central banks conduct a nation's monetary policy and are "the lender of last resort," which means they lend money to banks when an economy falters. In normal times, a central bank's main job is to control inflation through adjusting the money supply. The U.S. central bank is called the Federal Reserve.
Cheez Whiz – a processed cheese sauce manufactured by Kraft Foods.
Collateralized Debt Obligations (CDOs) – debt instruments collateralized by an asset of some sort that are restructured, re-packaged and re-sold, also called structured finance products.
Collateralized Mortgage Obligations (CMOs) – the further restructuring and repackaging of mortgages or MBS into a new type of security, also a structured finance product.
Commercial mortgage-backed securities (CMBS) – securities created by combining various types, structures and payment streams from commercial mortgages.
Commercial paper – short-term unsecured debt issued by corporations (banks and companies) to meet short-term needs for capital.
Commercial Paper Funding Facility (CPFF) – created by the Fed in September 2008 to buy commercial paper when the credit markets were frozen.
Commodity Futures Trading Commission (CFTC) – an independent agency created by Congress in 1974 regulate U.S. commodity futures and option markets.
Common Stock – securities representing equity ownership in a corporation, with voting rights but reduced claims for repayment in the event of bankruptcy.
Conservatorship – On September 7, 2008 the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac (the GSEs) into conservatorship, i.e. it became their guardian, controlling and providing money and having a direct say in operations.
Counterparties – the parties to a contract, i.e. banks, firms, and companies that bought and sold derivatives were counterparties to one another.
Credit default swaps (CDS) – a financial contract where a creditor sells the risk of credit default to someone else.
Credit markets / Cred-Mart – the term for the constant borrowing and lending transactions between banks, businesses and individuals through various financial transactions
Credit rating – the "score" or estimate of the risk of repayment for an investment; ratings are issued by a Credit Ratings Agency.
Credit ratings agency – There are three big ones: Moody's, Standard & Poor's and Fitch, whose business it is to issue credit ratings on investments.
Credit spreads – the difference between interest rates charged on safe versus more risky types of debt. Low spreads are typical, meaning investors perceive some, but not a huge, difference in risk between government and privately issued debt. See also LIBOR, TED spread
Credit squeeze/credit crunch – when it's hard to get credit or prices for credit rise so high a bank or company can't afford to borrow.
Creditor – the bank or investor that lends money to another, i.e. provides credit.
D
Deleveraging – reducing debt, so you have lower leverage.
Derivatives – financial contracts that derive their value from the underlying asset; that asset may be another financial contract.
Dilution – the reduction in equity ownership when additional stock is issued and sold.
Discount rate – the rate the Federal Reserve charges banks that borrow directly from the Fed usually short term.
Discount window – the facility through which banks borrow directly from the Federal Reserve.
Disorderly wind-down – the opposite of orderly wind-down, i.e. everybody scrambles to get money owed back from a company or bank that is failing, and mayhem ensues.
E
Emergency Economic Stabilization Act (EESA) – the law passed by Congress and signed by President Bush in October 2008 that included various measures to stabilize the economy, including TARP.
Eva – my dog.
F
Fannie Mae / Fannie – nickname for the Federal National Mortgage Association created in 1938 by Congress to in a further quest for more and more affordable mortgages.
Federal Deposit Insurance Corporation (FDIC) – an independent agency created by Congress that insures bank deposits, examines and supervises financial institutions that have FDIC insurance, and takes over FDIC- insured banks when they are insolvent.
Federal funds rate – The target interest rate set by the Federal Reserve for overnight lending between banks.
Federal Housing Administration (FHA) – an office within the Department of Housing and Urban Development that provides government mortgage insurance on single-family, multi-family and manufactured homes.
Federal Home Loan Bank system (FHLB) – the first government-sponsored enterprise (GSE) created by Congress to support the national housing market.
Federal Reserve ("the Fed") – the United States's central bank.
Federal Housing Finance Agency (FHFA) - created on July 30, 2008, as part of the Housing and Economic Recovery Act of 2008, it replaced the previous GSE regulator (the Office of Federal Housing Enterprise Oversight [OFHEO]). FHFA regulates the GSEs and the U.S. secondary mortgage markets.
Financial system – the whole kit and caboodle of credit markets, equity markets, capital markets, borrowing, lending, buying and selling of investments between banks, companies and individuals, either in the United States or globally.
Financial wizards – those who took reckless risks and were a principal cause of our financial crisis.
Fiscal policy – the use of government spending and taxation to achieve economic goals.
Freddie Mac / Freddie – nickname for the Federal Home Loan Mortgage Corporation created by Congress in 1970 to provide affordable home mortgages.
Futures – contracts to buy a stock or commodity at a specific price at a future date.
G
Ginnie Mae – nickname for the Government National Mortgage Association that was created in 1968 when Congress split Fannie Mae in two. Ginnie Mae offers insurance for FHA and other government-insured loans.
Government Agency MBS / GSE MBS – the securities and pools of mortgage-backed securities (MBS) issued by the government-sponsored enterprises (GSEs).
Government Sponsored Enterprises (GSEs) – the four entities (Fannie Mae, Freddie Mac, FHLB, Ginnie Mae) created by government that must follow specific governmental directives to achieve housing policy goals.
Gross Domestic Product (GDP) – the total output of goods and services produced by labor and property in the United States.
H
Hedge funds – private investment funds for wealthy and institutional investors.
I
Industrial policy – when the government picks certain industries and favors them with tax benefits and other government policies to support their operations.
Interconnected – a fancy word that means the same thing as connected; banks across the country and the world are said to be interconnected because they settle contracts, agreements and payments in immediate, continual overlapping, offsetting and interwoven transactions.
L
Leverage – the verb and the noun that describes the by-product of borrowing; you "leverage" assets to buy more assets, and when you have done this you have "leverage," i.e. you owe money to someone else.
London Interbank Offered Rate (LIBOR) – the interest rate banks charge one another for unsecured loans, usually short term. The rate is often used as a barometer for the health of the financial system, a lower rate means banks have confidence.
Liquidity – the availability of money and credit for investing.
M
Mark to market – updating the value of an asset to reflect its current value in the market.
Monetary policy – the process of how the Fed adjusts the money supply to control interest rates. A "loose" monetary policy means the Fed is creating money to spur demand and lending, a "tight" monetary policy means the Fed is reducing the money supply to slow down demand.
Money supply – the total amount of money available for transactions and investments.
Moral hazard – when a bank, company or industry engages in risky practices because it believes the government will rescue it if it fails.
Mortgage-backed securities (MBS) – securities created by combining various types, structures and payment streams from residential mortgages.
N
Naked shorts / naked short selling – as compared to short selling, the naked short seller never actually borrows the stock, but trades as if he has.
O
Office of Comptroller of the Currency (OCC) – established in 1863 within the Treasury Department, the OCC charters, regulates, and supervises all national banks. It also supervises the federal branches and agencies of foreign banks.
Office of Federal Housing Enterprise Oversight (OFHEO) – regulator of the GSEs until Congress created the Federal Housing Finance Agency in 2008.
Office of Thrift Supervision (OTS) – created by Congress in 1989 as an office of Treasury, OTS is the regulator and supervisor of savings associations, and the holding companies that own them.
Orderly wind-down – the orderly, pragmatic wind-down (before or after bankruptcy) of a failing bank or company, which doesn't spread risk or mayhem.
P
Policy wonkese – the special, dense language used by experts, which is difficult for mere mortals to understand and often needs to be translated into regular English.
Preferred stock – securities representing equity ownership in a corporation, which are paid dividends and have preferential claims over common stock in the event of a bankruptcy.
President's Working Group on Financial Markets (PWG) – created by President Reagan, an inter-agency financial agency group chaired by the Treasury Department, and includes the SEC, the CFTC and the Fed.
Price discovery – the process of setting, negotiating and finalizing a price when the markets are stuck and can't set the price as they would through normal buying and selling.
Primary dealers – If a bank, investment bank or brokerage firm meets certain requirements the Federal Reserve can designate it a primary dealer, which means it can buy and sell government securities like Treasury bills, Treasury bonds or those Government Agency MBS from Fannie and Freddie.
Profoundly mistaken – a gentle synonym for silly.
R
Repurchase agreement ("repo") – They're called repurchase agreements because banks, dealers and investors borrow cash by pledging a security as collateral and at the same time they agree to repurchase the same security at the end of the loan term.
Retained earnings – earnings or profits not spent by a company, but "retained" for future investment.
S
Secondary market – the broad term referring to markets where you can re-sell or trade securities, examples are the stock market, the bond market or the U.S. Treasury market.
Securities and Exchange Commission (SEC) – created by Congress in the middle of the Depression, the SEC's mission "is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation," i.e. they are the primary regulator overseeing securities markets.
Securitization – the process of repackaging multiple securities or assets (like mortgages or auto loans) into new securities, which are then bought and sold based on their new structure rather than the original loan or asset characteristics.
Security / securities – pretty much includes any financial instrument issued by a company or government that is evidence of owing or being owed money, such as through debt or equity. Securities are traded on stock and other secondary markets.
Shadow banking system – the proliferation of lending and other financial transactions for consumer and business purposes conducted by non-banks.
Short selling – "borrowing," i.e. never actually taking possession of a stock, but using the position to buy the right to sell the stock at a specific price in the future, even if the market price is lower.
Spot – the name of my friend Catherine's cat; also a term used for buying and selling stock immediately, i.e. "on the spot."
Structured finance / credit / debt – complex financial products that put pieces of assets, debt and securities into a new "structure" that is then sold to investors.
Structured investment vehicles (SIV) – pools of structured finance investment assets and securities that were usually held off a bank's balance sheet.
Systemic event – an event like a bank failure or the impairment of a widely held asset class (such as mortgage-backed securities) that ripples through and causes problems in the financial system.
Systemic risk – the danger that the entire financial system could stop working because of a specific or systemic event, such as a bank failure.
T
TARP (Troubled Asset Relief Program) – authorized within the EESA, this was a $700 billion program to save the financial system, either by purchasing impaired assets (like MBS) from banks or directly purchasing capital in banks, as through the Capital Purchase Program.
TED spread – A credit spread, measuring the difference between interest rates for the three-month Treasury Bill and LIBOR.
Temporary Liquidity Guarantee Program – created by the FDIC in October 2008 to guarantee newly issued debt and provide unlimited transaction deposit insurance to eligible financial institutions, temporarily.
Term Asset-backed securities Lending Facility (TALF) – created by the Fed and Treasury in November 2008 to support issuers of consumer-asset backed securities.
Term Auction Facility (TAF) – created by the Fed to boost banks' liquidity; the TAF widened both the type of collateral and the institutions that could benefit from borrowing "longer-term," which meant about 28 days, versus the normal overnight borrowings.
Term Securities Lending Facility (TSLF) – a $200 billion program created by the Fed in March 2008 to lend against all MBS, issued either by the GSEs or private financial institutions.
(Office of) Terrorism and Financial Intelligence (TFI) – created within the Treasury Department after 9/11, TFI combines intelligence and enforcement to protect the financial system against illicit use, combating rogue nations, terrorist facilitators, weapons of mass destruction (WMD) proliferators, money launderers, drug kingpins, and other national security threats.
Treasury securities (T-bills, notes and bonds) - marketable securities issued by the U.S. government, through the Department of Treasury, which are the debt obligations we use to borrow money to meet government expenses not covered by tax revenues. T-bills are issued for one year or less. Treasury notes are issued for one to ten years; Treasury bonds are longer than ten years.
Toxic assets – nickname for assets, primarily mortgage-backed securities, which banks held and couldn't sell, or sell for anything near their book value.
V
Volatility – wide swings in stock market trading ranges.
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