Asset Backed Security (ABS)
An asset-backed security is a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. For investors, asset-backed securities are an alternative to investing in corporate debt. An ABS is essentially the same thing as a mortgage-backed security, except that the securities backing it are assets such as loans, leases, credit card debt, a company's receivables, royalties and so on, and not mortgage-based securities.
Bank Holding Company
Bank holding company is broadly defined as any company that controls one or more banks. Becoming a bank holding company makes it easier for the firm to raise capital than as a traditional bank. The holding company can assume debt of shareholders on a tax free basis, borrow money, acquire other banks and non-bank entities more easily, and issue stock with greater regulatory ease. It also has a greater legal authority to conduct share repurchases of its own stock. The downside includes responding to additional regulatory authorities, such as the Federal Reserve and the Securities and Exchange Commission.
NOTE: Goldman, Sachs and Morgan Stanley became Bank Holding Companies during the 2008 crisis in order to benefit from the federal government’s Troubled Assets Relief Program (TARP).
This refers to the way a company finances its assets and operations through a combination of equity (stock), debt (loans), or hybrid securities. A company's capital structure is then the composition or 'structure' of its risks and liabilities. The company’s ratio of debt to total financing is referred to as its leverage.
Collateralized Debt Obligation (CDO)
CDOs are a type of structured asset-backed security whose value and payments are derived from a portfolio of fixed-income underlying assets. CDOs are split into different risk classes, or tranches, whereby "senior" tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk.
NOTE: Each CDO is made up of hundreds of individual residential mortgages. CDOs that contained subprime mortgages or mortgages underwritten because of predatory lending were at greatest risk of default. They are blamed for precipitating the global crisis and have been called “weapons of mass destruction.”
Commercial mortgage-backed security (CMBS)
CMBS are a type of asset-backed security that is secured by commercial and multifamily properties (such as apartment buildings, retail or office properties, hotels, schools, industrial properties and other commercial sites). The properties of these loans vary, with longer-term loans (5 years or longer) often being at fixed interest rates and having restrictions on prepayment, while shorter-term loans (1–3 years) are usually at variable rates and freely pre-payable.
NOTE: Commercial loans are often predicted as the next security class to default. Fitch, one of the three largest ratings agencies, estimates that defaults on the loans behind U.S. CMBs will continue to rise through 2010 and the overall rate of default for deals it has rated to exceed 11 percent by year-end.
Credit Default Swap (CDS)
A CDS is an insurance contract in which the buyer of the CDS makes a series of payments to the protection seller and, in exchange, receives a payoff if a security (typically a bond or loan or a collection of loans such as a CDO) goes into default.
NOTE: CDOs are widely thought to have exacerbated the financial crisis, by allowing investors who did not own a security to purchase insurance in case of its default. AIG almost collapsed because of these bets, as it was left on the hook for tens of billions of dollars in collateral payouts to some of the biggest U.S. and European financial institutions. AIG paid Goldman Sachs $13 billion in...
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