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COMPANIES
CASH COWS
CONVENTIONS
CAUSES
"CROOKS"
100
This is the first investment bank to have disclosed having to write down hedge funds tied to subprime mortgages. Rumours about a liquidity crisis in this bank eroded investor confidence and deterred market counterparties from extending credit to it. The US Federal Reserve had to bail it out in March 2008 by buying $30 billion worth of its assets and engineering a merger with JP Morgan Chase.
What is Bear Stearns?
100
This is an insurance contract in which the buyer makes a series of payments to the protection seller and, in exchange, receives a payoff if a security (e.g., a CDO) goes into default.
What is a credit default swap?
100
This is the use of various financial instruments or borrowed capital to increase the potential return of an investment. It is also used to describe the amount of debt used to finance a company's assets.
What is leverage?
100
This is a regulatory loophole that can be exploited by financial institutions that have become so massive that their collapse threatens to also bring down the rest of the economy.
What is 'too big to fail'?
100
This refers to a type of company to which Moody's, Standard & Poor's and Fitch belong. They give their opinions on whether certain types of debt securities are safe by evaluating the issuer's ability to pay back the loans.
What are credit rating agencies?
200
These are the two government-sponsored entities that were tasked to help implement US housing policy, particularly the relaxing of mortgage lending standards in order to provide affordable housing. The US government took over these two companies along with AIG in September 2008.
What are Fannie Mae and Freddie Mac?
200
This is a form of collateralized debt obligation (CDO) that invests in credit default swaps (CDSs) or other non-cash assets to gain exposure to a portfolio of fixed income assets. These instruments are the focus of the SEC’s fraud case against Goldman Sachs.
What is a synthetic CDO?
200
This is the process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. This process distributes risk by aggregating debt instruments in a pool, then issuing new securities backed by the pool.
What is securitization?
200
This is a federal law passed in 1977, designed to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations.
What is Community Reinvestment Act?
200
He served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He is a staunch advocate of unfettered free markets, and cut the federal funds rate to 1% in 2002, which is believed to have precipitated both the housing and the credit bubble.
Who is Alan Greenspan?
300
This is the investment bank that was allowed to go bankrupt, a decision that proved disastrous in that it resulted in panic in the short-term money market. The short-term money market is essential to the functioning of businesses.
What is Lehman Brothers?
300
These are a type of structured asset-backed security whose value and payments are derived from a portfolio of fixed-income underlying assets. They are split into different risk classes, or tranches, whereby "senior" tranches are considered the safest securities.
What are collateralized debt obligations?
300
This is the practice of reducing investment risk by bundling assets with low risk correlation--e.g., low chances of all the mortgages defaulting at the same time.
What is diversification?
300
This is a form of public policy that removes or simplifies the government rules and regulations that constrain the operation of market forces. It supports the efficient market theory in economics that states that financial markets are "informationally efficient" with prices accurately reflecting the value of a company of stock, the less taxes and regulation the more accurately price reflects value.
What is deregulation?
300
He is the CEO of Citigroup who famously remarked in July 2007, "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."
Who is Chuck Prince?
400
This is a commercial bank holding company that merged with Travelers Group, an insurance company, in 1998. This merger served to repeal the Glass-Steagall Act, which prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company.
What is Citicorp?
400
These are financial contracts with a value linked to the expected future price movements of the asset it is linked to - such as a share, currency, commodity or even the weather. They allow risks about the price of the underlying asset to be transferred from one party to another.
What are derivatives?
400
This is the practice of borrowing cash using the equity that had accumulated in one's home between the original financing transaction and any subsequent refinancing. Because interests on the home equity loans are deductible for federal tax purposes, this practice became popular among US homeowners in the years leading up to the crisis.
What is cash-out refinancing?
400
This happens when banks refuse to lend to other banks or financial institutions because they cannot reliably assess the exposures of other banks to toxic assets like collateralized debt obligations and credit default swaps.
What is a liquidity crisis or a credit crunch?
400
He was the Chairman and CEO of Lehman Brothers since 1994 until the bank's collapse in 2008. He received $22 million worth of bonuses in 2007.
Who is Richard Fuld Jr.?
500
This is the nation's largest sub-prime and nontraditional mortgage lender, which sold up to $97 billion worth of subprime mortgage loans in 2007.
What is Countrywide Financial?
500
This is an aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
What is a hedge fund?
500
This is the practice of attempting to reduce one's risk exposure (e.g., to adverse price movements in an asset) by taking an offsetting position in a security that is negatively correlated with the asset that one owns. This allows fund managers to maximise the return on investment for investors.
What is hedging?
500
This is an activity that is typical in a low interest rate environment when investors are all seeking to generate higher returns on their investments without adequately protecting themselves from the downside risks of such investments.
What is excessive risk-taking?
500
He was the Chairman and CEO of Goldman Sachs before he was appointed as Treasury Secretary by George W. Bush in 2006. While he was at Goldman Sachs, he lobbied for the lifting of leverage limits on investment banks. Together with Fed Chair Ben Bernanke, he was behind the decision to bail out Bear Stearns and AIG.
Who is Henry Paulson?