The following is a brief list of frequently used terms and acronyms that you may find throughout FinancialStability.gov. More terms and acronyms will be added soon, so check back frequently.

An Asset-Backed Security (ABS) is a type of financial security that is very similar in structure to a mortgage backed security (see definition below), but is backed by a pool of consumer loans and generally does not include mortgage loans.  Most ABSs are backed by credit card receivables, auto loans, student loans, or other loan and lease obligations.

Asset Guarantee Program (AGP), established under section 102 of EESA, allows the Department of the Treasury assume a loss position with specified attachment and detachment points on certain assets held by the qualifying financial institution; the set of insured assets would be selected by the Treasury and its agents in consultation with the financial institution receiving the guarantee. Read more…

Capital is a form of wealth (which can take the form of money, property, or other financial assets) that allows financial institutions to take risks and absorb losses during the process of financial intermediation, while honoring their obligations to depositors and other creditors.

Capital Assistance Program (CAP) is an effort to restore confidence in our financial institutions and ensure that they have the capital to continue to lend even in a more adverse environment. The supervisors are conducting stress tests of the nation’s financial institutions to determine whether they need additional capital to continue lending and absorb the potential losses that could result from a more severe decline in the economy than projected. Eligible financial institutions can either raise the necessary capital in the private markets, or issue convertible preferred stock to the government through CAP.

Capital Purchase Program (CPP) is a voluntary program in which the U.S. Government, through the Department of Treasury, invests in preferred equity securities issued by qualified financial institutions.  Participation is reserved for healthy, viable institutions that are recommended by their applicable federal banking regulator. Read more…

Under the Consumer and Business Lending Initiative, the Treasury and the Federal Reserve are working together to provide an initial $200 billion in financing to private investors to help unfreeze and lower interest rates for loans for students, small business, and others. This program has the potential to unlock up to $1 trillion of new lending and unfreeze currently frozen credit markets.

Collateralize Debt Obligation (CDO) An investment-grade security backed by a pool of bonds, loans and other assets. CDOs do not specialize in one type of debt but are often non-mortgage loans or bonds.  Similar in structure to a collateralized mortgage obligation (CMO) or collateralized bond obligation (CBO), CDOs are unique in that they represent different types of debt and credit risk. In the case of CDOs, these different types of debt are often referred to as ‘tranches’ or ‘slices’. Each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays.

Collateralize Debt Obligation (CDO) A type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds’ prospectus.  Here is an example how a very simple CMO works: The investors in the CMO are divided up into three classes. They are called either class A, B or C investors. Each class differs in the order they receive principal payments, but receives interest payments as long as it is not completely paid off. Class A investors are paid out first with prepayments and repayments until they are paid off. Then class B investors are paid off, followed by class C investors. In a situation like this, class A investors bear most of the prepayment risk, while class C investors bear the least.

Dividend Payments are a portion of the company’s earnings that are paid out to equity investors. Banks that are participating in the CPP will pay Treasury a cumulative dividend rate of five percent per year for the first five years and nine percent per year, thereafter.

The Emergency Economic Stabilization Act (EESA) is the bill that forms the foundation of the Financial Stability Plan. This Act provides critical tools, including the Troubled Asset Relief Program (TARP), to strengthen America’s financial system. Click here for the full text of the bill.

Mortgage-Backed Security (MBS) is a financial instrument that is backed by a mortgage or a group of mortgages that are packaged together.  The security is bought and sold in financial markets. A MBS can be backed either by residential real estate loans (RMBS) or commercial real estate loans (CMBS).  When you invest in a mortgage-backed security you are essentially lending money to a home buyer or business.  These securities must also be grouped in one of the top two ratings as determined by a accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments.  An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to worry about whether the customers have the assets to cover the loan. Instead, the bank acts as a middleman between the home buyer and the investment markets.  This type of security is also commonly used to redirect the interest and principal payments from the pool of mortgages to shareholders. These payments can be further broken down into different classes of securities, depending on the riskiness of different mortgages as they are classified under the MBS.  Also known as a “mortgage-related security” or a “mortgage pass through”.

Mortgages are loans in which a borrower (i.e. a home buyer) posts a property as collateral in order to receive a loan from a lender (i.e. a financial institution).  Mortgages are traditionally used in reference to real estate purchases.

Preferred shares (or stock) are a form of ownership in a company that generally entitles the owner of the shares (an investor) to collect dividend payments. Preferred shares are senior to common stock, but junior to debt.

Security is a financial instrument that represents debt, such as a bond, or represents ownership in an entity, (i.e. a stock).  A security can be assigned value and traded in financial markets.

Systemically Significant Failing Institution Program (SSFI) was established to provide stability and prevent disruptions to financial markets from the failure of institutions that are critical to the functioning of the nation’s financial system.

Targeted Investment Program (TIP) was created to stabilize the financial system by making investments in institutions that are critical to the functioning of the financial system.  This program focuses on the complex relationships and reliance of institutions within the financial system. Investments made through the TIP seek to avoid significant market disruptions resulting from the deterioration of one financial institution that can threaten other financial institutions and impair broader financial markets and pose a threat to the overall economy. Read more…

Term Asset-Backed Securities Loan Facility (TALF) is intended to assist the credit markets in accommodating the credit needs of consumers (by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA) by facilitating the issuance of asset-backed securities (ABS) and improving the market conditions for ABS more generally.  Read more…

Tranches A piece, portion or slice of a deal or structured financing. This portion is one of several related securities that are offered at the same time but have different risks, rewards and/or maturities. “Tranche” is the French word for “slice”.  Tranche is a term often used to describe a specific class of bonds within an offering wherein each tranche offers varying degrees of risk to the investor. For example, a CMO offering a partitioned MBS portfolio might have mortgages (tranches) that have one-year, two- year, five-year and 20-year maturities. It can also refer to segments that are offered domestically and internationally.

Troubled Assets Relief Program (TARP) was established under the EESA with the specific goal of stabilizing the United States financial system and preventing a systemic collapse.  Treasury has established several programs under the TARP to stabilize the financial system and has now created the Financial Stability Program will additional measures to stabilize the financial system, restoring the flow of credit to consumers and businesses. Read more…

Warrant is a financial instrument that gives the holder of the warrant the right to buy equity in the entity that issues the warrant at a specific price and within a certain period of time

While President Obama is jetting throughout Europe, more bad economic news have hit the fan.  Joblessness continue to be on the rise with sign of slowing, services provided by states such as unemployment benefits previously extended are quickly depleting, state and local taxes on the rise with fiscal budget deficits, and retirement and pensions plans are under pressure due to drop in value and the lack of contributions.

Critics continue to berate the Team Obama economic plan and its ability to solve the crisis as home prices continue to fall and there is lack of marketability of toxic assets to investors other than the banks themselves.  In the latest critical comments offered by experts, the supposed bank stress test move is nothing more than a “scam”, a white wash placebo to calm the American people.  This critique comes quickly on the heels of the news that FASB will relax and make changes to their “mark to market” accounting rules.

How long will American voters and taxpayers wait for results despite trillions of their money are going out the door to failed private corporations?  Take this poll.

Since there are no markets or buyers for these toxic assets, the bailed out banks who received taxpayers money through TARP or TALF will now trade these toxic assets between themselves to create the illusion that these assets are being moved.  By doing so these banks can agree on a “price” therefore artificially establishing a value to something that currently have no buyers and side stepping any generally accepted accounting rules or regulation such as “mark to market” per FASB.

This is is a real danger to American taxpayers and other investors of not replacing the senior management and the boards that supposedly watch over them.

How long will Americans wait for results from the trillions spent by the US Government supported by the Obama administration?
Bailed-out banks may buy toxic assets: report

• Friday April 3, 2009, 9:19 am EDT