Mortgage Bond
A bond (essentially, a loan) ultimately based on a pool of thousands of individual home mortgages
Tranches
Payments made by homeowners that are divided into different pieces that form the basis of mortgage bonds
Defaulting
Failing to pay back loans
Manufactured housing
Another term for mobile homes
Ponzi Scheme
An investment operation where earlier investors get returns through revenue paid by new investors, rather than from actual profits
To "short"
To bet against something
Credit default swaps
Insurance policies that had fixed terms for paying them off, meaning that you could only lose as much as you put in, but could make many times more if the company you invested in defaulted on its debt within that fixed term
Collateralized Debt Obligation (CDO)
A CDO gathered a hundred different mortgage bonds, usually the riskiest ones, and used them to erect a new “tower” of bonds that helped to make them look more attractive to potential investors
Sand States
California, Florida, Nevada and Arizona, where housing prices had risen fastest during the boom and so would likely crash fastest in a bust
Thin File
This meant a short credit history, which should have indicated that, even if the credit history was good, this could simply be because the borrower in question had never borrowed money before and thus had had no chance to bring their credit score down
Event-Driven Investing
An investing strategy that looks for long-term options that can be bought cheaply, when an investor has a good sense that they would become more valuable in the future. Coined by Cornwall Capital
CDO Manager
The job of a CDO manager was to select a Wall Street firm to supply him with subprime bonds that could serve as collateral for CDO investors, and then to vet bonds themselves. Then, they were supposed to monitor the individual subprime bonds inside each CDO and replace the bad ones, before they went bad, with better. Investors, however, usually expected that CDO managers would never even have to resort to this, because triple-A-rated bonds were supposed to be foolproof and impervious to losses. This lead many managers to feel that they did not have to closely monitor triple-A-rated bonds, and so CDO managers, in practice, did not have to do very much.
Mortgage
A legal agreement in which a bank lends money with interest to someone looking to buy a home, under the condition that the title of the home will become invalid if they fail to pay back the loan
Wall Street
A location in New York City where many banks are headquartered; by extention, the US financial markets as a whole
Housing Bubble
A rapid increase in home prices caused by rising demand and some speculation. It typically bursts when demand falls but supply continues to increase.
Hedge Fund
A managed portfolio of investments that engages in a number of different positions: leveraged, long, short and derivative. It typically only deals with those who have a signifiant amount of capital to invest in it
Asperger's Syndrome
A developmental disorder that is similar in a number of ways to autism. It is mainly characterized by awkwardness and very narrow interests
Asset
A piece of property that has value and can meet debts, commitments, or legacies
Securities
Something given as a guarantee of completing an undertaking or repaying a loan, which has to be given up if the other party defaults
Investor
Someone who puts their money behind a financial scheme, expecting some payoff from it
