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Administration
When a company gets into financial trouble and is unable to pay its debts, an administrator or administrative receiver may be appointed. The main goal of an administrator is to rescue the company as a going concern. If this isn't possible, the administrator will try to get a better result for the creditors - by rescuing parts of the business - than would be possible if the company was wound up. If this fails, the administrator will sell the company's assets to make at least a partial payment to creditors.
Black swan
An event that is extremely hard to predict. Generally associated with Nassim Nicholas Taleb's book, The Black Swan. Black swan events are typically random and unexpected, and some think the current financial crisis is a black swan. Before the discovery of Australia, it was assumed that all swans were white because nobody had seen one of a different shade. Markets tend to work on the basis that black swans either don't exist or appear with such irregularity that they are not worth worrying about.
Capital ratio
Capital ratios are a measure of a bank's capital strength used by regulatory agencies. Tier 1 (core) capital, the more important of the two, consists largely of shareholders' equity. This is the amount paid to originally purchase the shares of the bank and retained profits (minus losses). Put simply, if the original stockholders paid £100 to buy their stock and the bank has made £10 in profits each year since, paid out no dividends and made no losses, after 10 years the bank's tier one capital would be £200. National regulators now allow several other instruments other than common shares to count in tier one capital, which are commonly referred to as upper tier one capital.
Tier 2 capital is also known as supplementary capital. In the Basel I accord, it is categorised as undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt.
CDOs
Collateralised debt obligations - toxic financial instruments at the heart of the credit crunch. Banks embraced them as a way of shifting debt off their balance sheets, enabling them to lend more. The first CDO is said to have been issued in 1987 by bankers at the now defunct Drexel Burnham Lambert. In 20 years, the size of the market is estimated to have reached $2 trillion, and boomed between 2004 and 2007.
Chapter 11 bankruptcy
Chapter 11 is a chapter of the US bankruptcy code that gives a company an opportunity to reorganise and emerge from bankruptcy. Chapter 11 bankruptcy is a form of corporate financial reorganisation in which a company's assets gets sold off to pay creditors. In some cases, Chapter 11 bankruptcy allows companies to continue to function. Creditors must vote to approve the reorganisation plan. If a plan cannot be agreed, the court can either convert the case to a liquidation under Chapter 7 or, if this is in the interest of creditors, return the business to the status quo before bankruptcy. Individuals may also be able to file for Chapter 11 bankruptcy.
Credit crunch
The current global financial crisis is commonly known as the credit crunch, as lending between banks has all but frozen, and credit made available to consumers and businesses is being squeezed.
Credit default swaps
Credit default swaps (CDS) are instruments bought by investors to insure against defaults on corporate and other bonds. The contract involves a buyer paying a series of settlements to a seller; in exchange, the buyer receives the right to a payoff if a credit instrument goes into default.
The CDS market has been largely unregulated and last year was valued at twice that of the US Stock Exchange. The lack of transparency has meant exposures to bad debt is unknown.
Banks and other institutions have used credit default swaps to cover the risk of default in mortgage and other debt securities they hold. Many credit default swaps have sunk in value as the mortgage-backed securities they support have imploded.
If sellers of CDS outweigh buyers in the Lehman Brothers' auction, as some are expecting, then losses could hit 90% of insurance sold.
The auction will be one of the largest settlements of contracts in the $55 trillion market, with about $400bn in contract volumes estimated on Lehman's debt.
Dead cat bounce
A term used by traders to describe a pattern wherein a spectacular decline in share prices is immediately followed by a moderate and temporary rise before resuming its downward movement. While a dead cat will bounce if you drop it from a high building, that doesn't mean it's alive.
Hedge funds
After the woes of HBOS, hedge fund bosses, including the New York billionaire John Paulson , have come under fire for short-selling UK bank shares.
Libor
London interbank offer rate - the interest rate that banks charge each other for loans up to one year. The short-term international interbank market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. Libor is officially fixed once a day at around 11.45am by a small group of large London banks, but the rate changes throughout the day.
Naked shorts
Naked short-selling, or naked-shorting, is the illegal practice of selling a stock short without first borrowing the shares or ensuring that the shares can be borrowed, as is done in a conventional short sale. When the seller does not obtain the shares within the required time frame, the result is known as a "fail to deliver". However, the transaction generally remains open until the shares are acquired by the seller or the seller's broker, allowing a trade to occur when the order is filled.
National Economic Council
The 19-strong National Economic Council, chaired by the prime minister, was set up on October 3. It meets twice weekly to coordinate government action to tackle the banking crisis. The new committee has been dubbed an economic version of the exisiting Cobra emergency committee. A network of business ambassadors, including former BP boss Lord Browne and Lloyds TSB chairman Sir Victor Blank, has also been established to support the government overseas.
Pibs
Permanent interest-bearing shares - effectively, a form of subordinated debt issued by building societies which they can count towards their capital for capical adequacy calculations. The need arises because mutual institutions do not have the option of raising funds in the stockmarket.
Preference shares
Shares in a company which pay a fixed dividend but which do not usually carry voting rights. If the company is wound up, preference shares are usually repayable at par value, and rank above the claims of ordinary shareholders (but behind banks and other creditors).
Quantitative easing
Quantitative easing is what non-economists call 'turning on the printing press'. In extreme circumstances, governments flood the financial system with money, easing pressure on banks by giving them extra capital. Ben Bernanke, the chairman of the Fed, won the nickname 'helicopter Ben' when he floated just such an idea earlier this decade. US economist Milton Friedman had originally said it would be theoretically possible for governments to drop large amounts of cash out of helicopters for the public to pick up and spend.
Short-selling
Short-selling involves selling borrowed shares in the hope that the price will fall and they can be bought back at a profit later on.
The Financial Services Authority rushed in emergency rules to ban short-selling in bank shares, and ordered speculators to close down all short positions in bank shares, or have their names made public.
SIV
Special investment vehicle - SIVs have become a problem during the credit crunch. They are spun off from banks to borrow money cheaply and then buy securities such as mortgage-backed bonds and more complex instruments such as collateralised debt obligations that pay higher rates of interest. During the credit crunch, the value of the securities in SIVs has dropped.
Sonia
Sterling overnight interbank average rate - a proxy for the market's interest rate expectations. The rate is an index that tracks sterling overnight funding rates for trades that occur in off hours.
Special liquidity scheme
Launched by the Bank of England in April to encourage banks to lend to each other, the special liquidity scheme was extended in September. The Bank has doubled the size of the scheme - which allows banks to swap mortgage-backed securities for cash - to £200bn. The scheme allows banks to swap assets that they cannot trade on the markets for nine-month government bonds that are more liquid and more attractive to other banks. The swaps are essentially loans of taxpayer assets and the Bank hopes they will get the paralysed money markets moving again.
Tarp
Troubled asset rescue programme - the US government's controversial $700bn bail-out package for the financial industry which allows the US Treasury to buy toxic mortgage debts from banks. It failed to get through the House of Representatives the first time round, but a revised bill was passed a few days later. The UK government followed suit with its own momentous £500bn-rescue of Britain's banking sector.
Write down, write off
Many major banks have been writing down the value of mortgage-backed assets because they are no longer worth the figures at which they are shown in the books. Write offs are more severe than write downs - the whole of the value of the asset is deducted.
Zero interest rates
Central banks around the world have been slashing interest rates in a desperate attempt to get people and businesses spending again. In the US and Japan, rates are now close to zero, and the Bank of England has hinted that rates could fall to near zero in Britain too. In Japan, which suffered a prolonged period of deflation, interest rates were stuck at zero for six years until July 2006.
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