New vocabulary is born all the time. An event, a disaster or something that never before happened produces a plethora of words and phrases to describe it. This is especially true in the financial world.
Picture this: A sea of traders at megafinancial firms had front-row seats to the financial debacle of the past three years. For traders, the frenzy of these days were punctuated by jokes, quips, and invented anachronisms... repeated, reworked and finessed until the expression is slick and potent. And, then, these terms spread throughout the financially wired community. The newspapers pick them up and new terms are incorporated into their stories. Soon it is normal and customary parlance, from corporate boardrooms to local coffee shops.
Here are some of these new financial expressions, described within the context of the crisis:
It is well known that the financial markets crashed in 2008-09. The Federal Reserve Bank’s response to the markets’ meltdown was to get as much money into the banking system to thaw the frozen credit markets and reverse the (self-inflicted) misfortunes of the banks. Since the money found its way into the financial markets and these markets substantively recovered, we had a melt up for the past year. The Federal Reserve’s aggressive monetary policy was self-described as Quantitative Easing and, after some 18 months of constant use, the term was shortened to Q.E.
In 2008, the Federal Reserve argued to Congress for bailout funds and for special treatment for the banks and financial institutions that were too big to fail. Those too big to fail banks merged with others too big to fail, the result was gargantuan-sized firms that are also too big too fail.
What was the genesis of the economic downward spiral? The mortgage/ real estate/foreclosure crisis. The loan defaults were largely attributed to lending practices gone awry; conventional banking had been replaced by lending unfettered by risk; somehow utility lending had morphed into casino underwriting. Many mortgages were NINJA loans, those loans made to borrowers having “No Income, No Job or Assets.” Unqualified borrowers were clearly a problem with most of the sub prime mortgages. In foreclosure (or sometimes in anticipation of such), mortgagees terminated their responsibilities for the mortgagors by mail — mortgagee would send jingle mail (mail containing the house keys ) to the mortgagor.
For long time, maybe some 30 years, mortgages have been sold in collateralized mortgage pools. Not stopping there, in recent years, more financial innovation came to the mortgage markets. The next invention was, after pooling mortgages form all over the country, to slice and dice these pools by degree of risk; thus, another new instrument was the mortgage pool tranche. Somehow, the public was assured that even the worst mortgage credit risks were not such bad risks after all. Borrowers were diverse geographically and systematic risk (nondiversifiable financial systemwide risk) was deemed statistically insignificant. All this and more quantitative reasoning allowed the creation of economic models showing even the worst of the tranches to have acceptable credit ratings. The issuers of the pools and tranches wanted to insulate themselves form their underwriting risks so they created special purpose vehicles to issue the securities. They wanted no long-tail liability following them or their firms.
The problems with mortgages became widespread and spilled over to the larger credit markets. This bigger problem warranted new, broader terminology. Enter FUNT loans: the Financially UNTouchable loans. As problems worsened, untouchable was replaced with the term toxic, the broad language used to describe not only mortgages, but also any loan or other debt instrument of questionable or greatly depreciated value. The term toxic is first attributed, correctly or not, to Warren Buffett.
Were the borrowers solely to blame? Not necessarily. Often, the loan defaults were attributed to lending practices gone awry; conventional banking had been replaced by lending unfettered by risk; somehow utility lending had morphed into casino underwriting.
To address concerns about all credit risks (mortgage, country, corporate), banksters (bankers/gangsters) innovated once again and presented the endall solution: the credit default swaps. It was insurance that, if a principal or interest payment was missed, the debt holder could, through a variety of ways, be made whole. Case closed... credit quality was a non-issue… at least until the firms selling the CDS were closing their doors.
Some crisis events exposed of outright fraud. After many decades of use, the Ponzi scheme was replaced by the term being Madoffed. If the Ponzi scheme was small, then it was a mini- Madoff.
The Wall Street problem was disease like and had spread to the coasts, major cities and retirement spots. Affluenza (affluence/influenza) struck. Symptoms include: overspending, consumerism, excessive wealth seeking. Most of these folks have crashed and burned. No longer are they in limos and taking extravagant vacations. For the couple suffering from cashtration (financial impotency) all that’s left is a staycation, a frugal vacation spent close to home.
‘Tis true. It all happened and our lives and vocabulary are forever changed.
— Jeannette Rohn Showalter is a Southwest
Florida-b ased chart ered f inancial
analyst, considered to be the highest designation
for investment professionals. She
can be r eached at jsho waltercfa@ yahoo.