1) Financial Stability Plan (FSP)
It is a plan unveiled by the Obama administration in April 2009, and designed to stabilize the U.S. economy during the recent financial crisis . The Financial Stability Plan (FSP) promised to take measures to solidify the American banking system, securities markets, mortgage and consumer credit markets. This plan came as a response to the 2008 fallout in the mortgage and financial markets.
The FSP is estimated to cost the American taxpayer about USD1.0 Trillion. The FSP promised to create a new "public-private" governmental fund to absorb toxic assets and leverage private capital to stimulate the financial markets. It also aimed to standardize the banking system and provide capital to unstable lending institutions. A consumer-business lending initiative was also included to restore consumer credit for stable borrowers.
2) Bailout
It refers to a situation in which an individual, business, or government offers money to a failing business in order to prevent the consequences that arise from a business's downfall. Bailouts can take the form of loans, bonds, stocks or cash. They may or may not require reimbursement.
Bailouts have traditionally occurred in industries or businesses that may be perceived as no longer being viable, or are just sustaining huge losses. These companies typically employ a large number of people, leading some people to believe that the economy would be unable to sustain such a huge jump in unemployment if the business folded.
For example, Chrysler, a large U.S. automaker was in need of a bailout in the early 1980s. The U.S. government stepped in and offered roughly USD1.2 Billion to the failing company. Chrysler was able to repay the entire bailout , and is currently a profitable firm.
One of the biggest bailouts is the one proposed by the U.S. government in 2008 that will see USD700.0 Billion put toward bailing out various financial organizations and those affected by the credit crisis.
3) Troubled Asset Relief Program - TARP
It refers to a a government program created for establishing and managing a Treasury fund, in an attempt to curb the ongoing financial crisis.
TARP gives the U.S. Treasury purchasing power of USD700.0 Billion to buy mortgage backed securities (MBS) from institutions across the country, in an attempt to create liquidity and un-seize the money markets. The fund was created by a bill that was made law on October 3, 2008 with the passage of H.R. 1424 enacting the Emergency Economic Stabilization Act of 2008. The Treasury will be given USD250.0 Billion immediately, and the President must certify additional funds as they are needed. The additional funds will be distributed as USD100.0 Billion, and as the final USD350.0 Billion is given, Congress has the right to not approve the additional amounts.
Need for TARP
The global credit markets came to a near stand still in September 2008, as major financial institutions, such as Lehman Brothers, Fannie Mae, Freddie Mac and American International Group (AIG), went under. In a few surprising moves, heavyweights Goldman Sachs and Morgan Stanley even changed their charter to become commercial banks, in an attempt to stabilize their capital situation. The bailout will attempt to increase the liquidity of the secondary mortgage markets by purchasing the illiquid MBS, and through that, enable reduction in the potential losses that could be felt by the institutions who currently own them.
In October 2008, revisions to the program were announced by Treasury Secretary Paulson and President Bush; allowing for the first USD250.0 Billion to be used to buy equity stakes in nine major U.S. banks, and many smaller banks. This program demands that companies involved lose some tax benefits, and in many cases incur limits on executive compensation.
Source: Investopedia
Thursday, May 14, 2009
Tuesday, May 5, 2009
Financial Terms-I
1) L,V and U
These alphabets refer to the types of recessions(i.e. L-shaped, V-shaped and U-shaped ones) according to economists globally.
*The L-shape recession is one that goes down and then stays there for a long period of time without a recovery. It could last for 20 years like it happened in Japan.
*A V-shape recession goes down pretty fast and recovers in very less time.
*A U-shape recession goes down slowly and then stays there for a few years before recovering slowly. It's length could be anywhere from 2-10 years, like in the 1970s in US where it lasted for 8 years.
Most of the times, it is the economic policy adopted by a government before recession, which determines what type of recession it is. Wrongly calibrated economic policies lead to L-shape recessions, which the worst of the lot.
2) Stress Testing
It refers to a simulation technique used on asset and liability portfolios to determine their reactions to different financial situations. Stress tests are also used to gauge the effects of certain stressors on a company or industry. They are usually computer-generated simulation models that test hypothetical scenarios.
It is a useful method for determining how a portfolio will fare during a period of financial crisis. One of the most widely used methods of stress testing, is the Monte Carlo simulation.
The strength of financial institutions can be also evaluated using a stress test.
An example would be, the Treasury Department running stress tests on banks to determine their financial condition. Banks often run these tests on themselves. Interest rates, lending requirements or unemployment could be among the changing factors.
3) Plain Vanilla
Refers to the standard or basic version of a financial instrument, usually options, bonds, futures and swaps. Plain vanilla is the opposite of an exotic instrument, which alters the components of a traditional financial instrument, which results in a more complex security.
E.g. a plain vanilla option would be the standard type of option, one with a simple expiration date and strike price and no additional features.
Source: News articles, Websites, Investopedia
These alphabets refer to the types of recessions(i.e. L-shaped, V-shaped and U-shaped ones) according to economists globally.
*The L-shape recession is one that goes down and then stays there for a long period of time without a recovery. It could last for 20 years like it happened in Japan.
*A V-shape recession goes down pretty fast and recovers in very less time.
*A U-shape recession goes down slowly and then stays there for a few years before recovering slowly. It's length could be anywhere from 2-10 years, like in the 1970s in US where it lasted for 8 years.
Most of the times, it is the economic policy adopted by a government before recession, which determines what type of recession it is. Wrongly calibrated economic policies lead to L-shape recessions, which the worst of the lot.
2) Stress Testing
It refers to a simulation technique used on asset and liability portfolios to determine their reactions to different financial situations. Stress tests are also used to gauge the effects of certain stressors on a company or industry. They are usually computer-generated simulation models that test hypothetical scenarios.
It is a useful method for determining how a portfolio will fare during a period of financial crisis. One of the most widely used methods of stress testing, is the Monte Carlo simulation.
The strength of financial institutions can be also evaluated using a stress test.
An example would be, the Treasury Department running stress tests on banks to determine their financial condition. Banks often run these tests on themselves. Interest rates, lending requirements or unemployment could be among the changing factors.
3) Plain Vanilla
Refers to the standard or basic version of a financial instrument, usually options, bonds, futures and swaps. Plain vanilla is the opposite of an exotic instrument, which alters the components of a traditional financial instrument, which results in a more complex security.
E.g. a plain vanilla option would be the standard type of option, one with a simple expiration date and strike price and no additional features.
Source: News articles, Websites, Investopedia
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