Must read: Layman’s financial crisis glossary
BBC amasses the most-used terms in the current mess on Wall Street and beyond, from A to Z. Choice samples:
- Collateralised debt obligations (CDOs)
A collateralised debt obligation is a financial structure that groups individual loans, bonds or assets in a portfolio, which can then be traded.In theory, CDOs attract a stronger credit rating than individual assets due to the risk being more diversified. But as the performance of some assets has fallen, the value of many CDOs have also been reduced.
- Credit default swap
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 default on a loan. - Leveraging
Leveraging, or gearing, means using debt to supplement investment.The more you borrow on top of the funds (or equity) you already have, the more highly leveraged you are. Leveraging can maximise both gains and losses.
- 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 new investment tails off or significant numbers of investors simultaneously wish to withdraw funds. - 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 now unlikely that it will be repaid.
Left off the list:
- Taxpayers:
Rubes who will pay for other people’s foolishness for the next 20 years