Financial Terms
From iGeek
These are a bunch of financial terms (concepts really), that you can scan to get familiar with the jargon and ideas.
~ Aristotle Sabouni
Created: 2017-05-15 |
I’ll keep from getting too nerdy, so these are just some basic terms you should understand before having an opinion on the Financial_crisis_of_2007-2008:
- Commercial banks - Commercial banks loan money to businesses in the form of cash (and give you interest in cash), and you can take out your cash at any time. Most investments are low risk (floating lines of credit, property/asset backed investments, etc.). But the overhead and low-risk investments means you get lower-returns. (This is what most people think of as banks).Commercial banks loan money to businesses in the form of cash (and give you interest in cash), and you can take out your cash at any time. Most investments are low risk (floating lines of credit, property/asset backed investments, etc.). But the overhead and low-risk investments means you get lower-returns. (This is what most people think of as banks).
- Credit market - Banking, Securities, and networks of private investors provide the economy with the "credit market". (Capital). Which is the root of capitalism.Banking, Securities, and networks of private investors provide the economy with the "credit market". (Capital). Which is the root of capitalism. Your right to loan/borrow/invest without going through the government is Capitalism. The government controlling investments is Socialism, Communism or Fascism.
- Fannie Mae • Freddie Mac • GSEs - Fannie/Freddie are GSE's (Government Sponsored Entities) that broker most loans (70-80%) in the U.S. (Banks only give you loans, because someone will buy them off them, and sell them back more diversified/lower risk holdings).Fannie/Freddie are GSE's (Government Sponsored Entities) that broker loans and thus set all the rules/regs that people follow. The whole point of this New Deal era program is to get more people to borrow money (make it easier, especially low end / high risk). With this capital freed up (it's in debt), people will spend more in the economy. But when things turn bad, they can lose everything.
- Glass-Steagall - Glass-Steagall was the 1930's new deal regulation that separated Commercial and Investment banks. That is all.Glass-Steagall was the 1930's new deal regulation that said Commercial and Investment banks had to be separated. There would be no "universal" banks (that did both). In theory, by separating sides there would be more transparency, and people might behave less risky. In truth, there's just more inefficiency and the same risk.
- Investment banks - Investment banks are more about stocks (equity). They help companies and individuals buy/sell stock/bonds/derivatives with each other (stock offerings, bond sales, Mergers & Acquisition, stock accounts and so on). So customers hold these things (paper/securities) that can be turned into cash through trades, but aren't cash themselves (thus there's more volatility/risk). Because customers are accepting more risk (the paper is more volatile than cash), they get much higher returns than traditional banking. (This is what most people think of as Wall St. or eTrade)Investment banks are more about stocks (equity). They help companies and individuals buy/sell stock/bonds/derivatives with each other (stock offerings, bond sales, Mergers & Acquisition, stock accounts and so on). So customers hold these things (paper/securities) that can be turned into cash through trades, but aren't cash themselves (thus there's more volatility/risk). Because customers are accepting more risk (the paper is more volatile than cash), they get much higher returns than traditional banking. (This is what most people think of as Wall St. or eTrade)
- Mark-to-market - Dumb/democrat idea of increasing the volatility of assets held by banks, by marking their value to the last market sale.FAS-157 passed in 2006 by Democrats said that instead of valuing an asset on a low-volatility manner (pegging a value to a 3-5 year rolling average), all assets of a like kind must be pegged to the last market sale. (Mark that value to the last market sale).
- Mortgage Backed Security (MBS) - An MBS is a diversified package of many loans, to lower the risk by not tying it to any one area/demographic.An MBS is a diversified package of many loans, to lower the risk by not tying it to any one area/demographic. It was also used by Fannie/Freddie (and later others) to bundle in high risk loans (poison), with low risk loans. Politicians get to redistribute wealth to lower incomes. But unravelling the bad and good loans in a crisis was a mess. (It magnified the crash).
- Risk-Reward ratio - The more risk you take, the more reward you need to get to be worth the risk.The more risk you take, the more reward you need to get to be worth the risk. Higher risk investments must pay more dividends to offset the risks of losing it, in order to entice investors. Lower risk investments, can pay less (lower interest) because they're "safer".
- TARP - Troubled Asset Relief Program: The government forced Banks to take money for a crisis government created. Then blamed banks.Troubled Asset Relief Program: this was Government forcing Banks to take money, so they could comply with government regulations to make loans. All to get around a crisis that government (mostly Democrats) created. Then Democrats blamed the banks for taking the money, and used it as an excuse to put more regulations on the banks.
- Universal banks - Universal banks are banks that can do bott: investments and commercial banking.Universal banks are banks that can do both (investments and commercial). They're definitely less risky that Investment houses, but arguably safer than either since they're more diversified. These were illegal in the U.S. under Glass-Steagall, but allowed in the rest of the world.
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Tags: Economics Terms Crisis Financial crisis of 2007-2008/all
