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 then be traded. Banks who buy these securities receive income when the original home-buyers make their mortgage payments.
Security: Essentially, a contract that can be assigned a value and traded. It could be a stock, bond or mortgage debt, for example.
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 its owner, pocketing the difference. Also known as shorting.
Special purpose vehicle: A subsidiary company used to hold particular types of assets that are consequently not listed in the balance sheet of the parent company. Special purpose vehicles became notorious after the Enron collapse when it became clear that the company had used them to hide debts. In the run-up to the current crisis many banks used special purpose vehicles to invest in US mortgages.
Solvency: The ability to pay expenses and debt on time and continue operating. An insolvent company typically has to seek bankruptcy protection from creditors.
Subprime mortgages: Mortgages granted to homeowners who cannot provide proof of income or assets as collateral. Many such homeowners were unable to pay off their mortgages as interest rates rose and house values sank.
Swap: In the most common form of swap the counterparties agree to exchange the streams of income from two loans, usually a fixed rate loan and a floating rate loan. Another common type of swap exchanges principal and interest of loans in different currencies.
Tier 1 capital: A calculation of the strength of a bank in terms of its capital, defined by the Basel Accords, typically comprising ordinary shares, disclosed reserves, retained earnings and some preference shares.
Toxic debt: Debt that is very unlikely to be recovered from borrowers. Most lenders expect that some customers will not be able repay; toxic debt describes a whole class of loans that is unlikely to be repaid.
Treasuries: Securities sold by the federal government to investors to fund its operations, cover the interest on U.S. government debt, and pay off maturing securities. Because they carry the full backing of the government, Treasuries are viewed as the safest investment.
Unwind: To unwind a deal is to reverse it - to sell something that you have previously bought, or vice versa. When administrators are called in to a bank, they must do the unwinding before creditors can get any money back.
Underwriters: When used of a rights issue, the institution pledging to purchase a certain number of shares if they are not bought by the public.
Write-downs: Reducing the book value of an asset because it is overvalued compared to its current market value.
(Agencies via China.org.cn November 13, 2008)
