Crisis-speak: a glossary

Illiquidity - If you owe someone a dollar and you don’t have one, you are illiquid.

Insolvency - If you owe someone a dollar and you don’t have one, and if you sold everything that you own and you still wouldn’t have one, you are insolvent. (But as long as you own something that’s hard to put a value on, no one can prove that you’re insolvent. Upon this rock stands the entire financial system.)

Moral hazard - Economistese for “It’s only a rental.” You get to party, and someone else cleans up the mess. It turns out that the banking system was only a rental, except that after taxpayers rebuild the engine, the bankers expect it back for another spin.

Risk - In Victorian times, what investors were paid to bear. Thanks to recent innovations in financial engineering, however, risk can be so finely sliced, traded, and transferred that no one even notices when it ends up in Aunt Millie’s bank account.

Mark-to-market valuation - The antiquated notion that a thing is worth what someone else is willing to pay for it, its current market value. Okay in rising markets, but when prices fall, techniques such as “mark-to-model” or “mark-to-myth” better support investor confidence.

Hold-to-maturity valuation - A financial asset represents a bunch of promises by someone to pay you money in the future. If you pretend you know how well those promises will be kept, you can pretend you know the value of the asset.

Libor - An interest rate that London bankers charge one another to borrow money. Important, because whatever bankers have to pay, the rest of us have to pay and then some.

TED spread - Not a condiment. A measure of stress in the credit markets, defined as the difference between what your average bank and Uncle Sam have to pay to get a three-month loan.

Counterparty meltdown - The biggest, most secret fear of the credit crisis. Suppose Alice owes Bob a million dollars, Bob owes Sue a million dollars, and Sue owes Alice a million dollars. Since Alice, Bob, and Sue each owe and are owed a million dollars, these big obligations wash out, they are all okay. But suppose Sue has huge gambling debts and declares bankruptcy. Now Alice owes a million dollars to Bob, but no one owes Alice anything. Alice doesn’t have the money, now that she can’t take it from Sue, so she declares bankruptcy too. Bob still owes money to Sue, and Alice is gone, so he is broke as well. In a network of interlocking debtors, one bankruptcy can force many to go down.

Depression - An implicit threat by way of which financial institutions are able to extort ransom to the tune of seven hundred billions.

by Steven Randy Waldman, New York, Oct 13, p.12