A Glossary of Terms Behind the Headlines

Friday, September 26, 2008

The credit crisis that has led to calls for a bailout of the nation's financial system also has introduced some unfamiliar terms to the general public.

Capital markets: Any market where companies or governments raise money to fund themselves. The stock market and the bond market are the most widely used.

Commercial paper: The short-term borrowing that companies use to finance their day-to-day operations and cash needs. The corporate equivalent of a credit card.

Conservatorship: A legal status similar to bankruptcy, in which the government takes control of a company with the intention of restructuring it and returning it to private ownership. Housing finance companies Fannie Mae and Freddie Mac are now under conservatorship.

Credit default swap: A contract that allows investors to make bets on the likelihood a company will be unable to pay its debts.

Exotic home loans: Unconventional loans such as those allowing payment of interest only, those with balloon payments or those with an interest rate that may adjust steeply. (Note: not all adjustable-rate mortgages are exotic. One-year ARMs have been used responsibly since the early 1980s.)

Fannie Mae: A company created by the government in 1938 to expand the flow of mortgage money. Formally known as the Federal National Mortgage Association. It operates under a congressional charter that directs the company to channel its efforts into increasing the availability and affordability of homeownership for low-, moderate- and middle-income Americans. The firm buys mortgages that meet its standards, guarantees their credit and repackages them as bonds for sale to investors. The federal government put the company into conservatorship in early September.

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