Boom Bust and Blame

Crisis A-Z


Case-Shiller Index:
A value-based measurement of the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States. These indices use the repeat sales pricing technique to measure housing markets. First developed by Karl Case and Robert Shiller, this methodology collects data on single-family home re-sales, capturing re-sold sale prices to form sale pairs. This index family consists of 20 regional indices and two composite indices as aggregates of the regions. The metropolitan regional indices are combined to form two composite indices – one comprising 10 of the metro areas, the other comprising all 20 – to serve as measurable monthly benchmarks of the national residential real estate market

The S&P/Case-Shiller Home Price Indices are calculated monthly and published with a two month lag. New index levels are released at 9am EST on the last Tuesday of every month. In addition, the S&P/Case-Shiller U.S. National Home Price Index is a broader composite of single-family home price indices for the nine U.S. Census divisions and is calculated quarterly.

The S&P/Case Shiller Indices are calculated by Fiserv, Inc. and is maintained by an Index Committee, whose members include Standard & Poor's, Fiserv and leading industry experts. It follows a set of published guidelines and policies that provide the transparent methodologies used to maintain the index.

The S&P/Case-Shiller Home Price Indices began as a research project in the 1980's when Karl E. Case and Robert J. Shiller began to construct a methodology to measure housing price movement. They developed the repeat sales pricing technique,still considered the most accurate way to measure this asset class. The methodology measures the movement in price of single-family homes in certain regions. This is done by collecting data on sale prices of specific single-family homes in the region. Each sale price is considered a data point. When a specific home is resold, months or years later, the new sale price is matched to the home's first sale price. These two data points are called a "sale pair." The difference in the sale pair is measured and recorded. All the sales pairs in a region are then aggregated into one index. Sales pairs are carefully screened for any data points that would distort the index. These factors include foreclosures, non-arms length transactions (sales between family members) and suspected data errors where the order of magnitude of the change is substantially different from other sales pairs in the region.

The indices are designed to measure the change in the price of homes that have not undergone significant positive or negative changes in quality. Sales pairs are assigned weights to account for fluctuations in price that can be attributed to factors like extensive home remodeling, adding a home addition, or extreme neglect. For example, the indices assign smaller weights to sales pairs with large change in sales price relative to the community around them. The assumption is that this change is due to remodeling or neglect. Sales pairs are also weighted based on time intervals between sales. Sales pairs with longer time intervals are given less weight than sales pairs with shorter intervals to account for the probability of physical changes. The accuracy of the S&P/Case-Shiller Home Price Indices is dependent on the accuracy of its data.

Case, Karl:
Founding partner in the real estate research firm of Fiserv Case Shiller Weiss, Inc. and serves as a member of the Board of Directors of the Mortgage Guaranty Insurance Corporation (MGIC) and of the American Real Estate and Urban Economics Association. Case is also the Katherine Coman and A. Barton Hepburn Professor of Economics at Wellesley College where he has taught for 30 years.

Professor Case received his B.A. from Miami University in 1968, spent three years on active duty in the Army, and received his Ph.D. in economics from Harvard University in 1976.

Professor Case's research has been in the areas of real estate, housing and public finance. He is author or co-author of five books including Principles of Economics, Economics and Tax Policy and Property Taxation: The Need for Reform and has published numerous articles in professional journals. Principles of Economics, a basic text co-authored with Ray C. Fair, is in its eighth edition and has been adopted at more than 450 colleges and universities.

For the last 25 years, Case's research has focused on real estate markets and prices. He has authored a number of studies that attempt to isolate the causes and consequences of boom and bust real estate cycles and their relationship to economic performance.

Cayne, James (Jimmy):
James Cayne is the former Chief Executive Officer of Bear Stearns Inc. He served in the position from 1993 until January 2008, just months before the firm was acquired in a government-orchestrated emergency sale by JP Morgan Chase. Before becoming Bear Stearns CEO, Cayne was the company's president. He is also a world-class bridge player.

Cayne was born on February 14, 1934. He attended Purdue University but enlisted in the U.S. Army before he could obtain a degree. At times in his life, he had been a taxi driver, a scrap-iron salesman and sold photocopiers. In 1964, Cayne's first marriage dissolved and he moved to New York City, where he drove a cab for a living while playing bridge professionally. He started playing bridge full time and won his first tournament in 1966. That skill endeared him to his mentor, Alan "Ace" Greenberg, who hired him as a stockbroker for Bear Stearns in 1969. His exceptional bridge skills and connections helped him grow in the firm at a very fast pace, eventually becoming president in 1985 and succeeding Greenberg as CEO in 1993.

Cayne assumed the post of Chairman of the Board in 2001. In 2005, he was ranked among the 400 richest Americans listed by Forbes, where he occupied the 384th position. His assets where estimated at $900 million. In 2006, he was the first Wall Street chief to own a company stake worth more than $1 billion.

In Cayne's 40 years with the firm, 15 of them as CEO, Bear Stearns changed from a fiscally conservative traditional Wall Street brokerage house to a publicly-traded world marketplace with a shaky foundation of debt-focused securitization.

As Bear Stearns headed toward bankruptcy, Cayne was playing in a bridge tournament in Detroit, golfing and out of touch. In January 2008, Cayne stepped aside as CEO and was replaced by then-president, Alan Schwartz. Shut out from a position at JP Morgan, Cayne sold his stake in the company for $61 million after losing a billion dollars in the collapse of the firm. He is married and has two children.

CBOE – Chicago Board Options Exchange:
Among U.S. securities exchanges, CBOE advertises that since it founded the listed options business in 1973, it has been the leader in options volume every single year. In 2008, CBOE options contract volume was an all-time record of 1,193,355,070 contracts (up 26% over the previous year).

In 1993, the CBOE asked Robert E. Whaley, then a professor at Duke, to create a new revenue stream: a measurement of market anxiety or investor fear that investors could bet on using futures and options.

Whaley devised the VIX, a gauge of trader anxiety that tabulated the premiums paid by investors who buy options tied to the price of the Standard & Poor's 500-stock index. Whaley compared his invention to a barometer of fire insurance purchases in a neighborhood where an arsonist is on the loose. That neighborhood is Wall Street, where investors are more eager to buy insurance during troubled times, even at the expense of higher than usual premiums. This activity pushes up the level of the VIX; the higher the VIX, the lower the confidence of traders in where the market is headed.

Cityscape Financial:
Elmsford, NY-based subprime mortgage lender that from 1995 to 1997, securitized and sold $2.7 billion in loans, mostly home equity loans, in the United States as well as in the United Kingdom. Cityscape's British subsidiary CMC raked in more than 50% in profits in 1996 on just 26% of sales. Aggressive lending practices, such as high early redemption fees, drew the ire of customers and regulators.

In 1997, Cityscape admitted that it found mortgage fraud in a $130 million portfolio bought from a New Jersey source. Then, Moody's twice downgraded the company's senior debt. In a year's time, prompted further by deteriorating business conditions, Cityscape stock plunged to $2.75 and the company filed a Chapter 11 bankruptcy petition in June 1998. A class action lawsuit brought against Cityscape's CEO Robert Grosser, Executive Vice President Robert Patent and General Counsel Jonah Goldstein, alleged they misrepresented and failed to disclose that a substantial portion of Cityscape's income was derived by engaging in inappropriate loan and accounting policies in the UK. The suit was settled for $2.3 million in January 2001.

CDOs – Collaterized Debt Obligations:
CDOs are diversified, multi-class securities backed by pools of bonds, bank loans, or other assets. These securities funded $380 billion in mortgage loans in 2008. CDOs typically allow securities to be issued with a higher credit rating than the securities used to back the CDOs, such as corporate bonds, commercial loans, asset-backed securities, residential mortgage-backed securities, commercial mortgage-backed securities, and emerging market debt. These securities are typically divided into several classes, or bond tranches, that have differing levels of credit tolerances and typically contain at least one class of investment-grade bonds. Most CDO issues are structured in a way that enables the senior bond classes and mezzanine classes to receive investment-grade credit ratings; credit risk is shifted to the most junior class of securities. If any defaults occur in the assets backing a CDO, the senior bond classes are first in line to receive principal and interest payments, followed by the mezzanine classes and finally by the lowest rated (or nonrated) class, which is known as the equity tranche.

CME – Chicago Mercantile Exchange:
The Chicago Mercantile Exchange is a self-regulating futures exchange owned and operated by CME group and headquartered in Chicago, Illinois. CME Group Inc. also owns and operates CBOT, aka the Chicago Board of Trade. In 2009, CME competed with Intercontinental Exchange for a stake in the lucrative credit default swap market. Central clearing of CDS trades is seen as essential to eliminating risks related to the potential failure of a large counterparty. Fears of margin losses helped trigger a run on Bear Stearns and Lehman Brothers and sparked government calls for mandatory clearing of standardized CDS trades.

By "clearing" CDSs, the CME becomes a counterparty in every CDS trade and manages the credit exposures from the time the trade is made to when the trade is officially settled. Clearing also ensures delivery of the securities and makes sure trades are settled legally and according to the rules of the market, even if the buyer or seller becomes insolvent. It is a lucrative line of business: CME recorded $458 million in clearing and transaction fee revenue in the second quarter of 2008, up 9% from the same period in 2007.

Conforming Loans:
Loans that "conform" to the guidelines set up by the large national mortgage stock market, referred to as the secondary market. Money to fund first mortgages comes from special stocks funded in the secondary market that conform to the specific guidelines, which include maximum loan amounts, maximum loan to value ratio, "A" rated credit borrowers and accurate home appraisals.

Countrywide Financial:
Once the country's biggest mortgage lender, acquired by Bank of America in 2008 for $2.5 billion in stock and folded into BofA. Co-founded by Angelo Mozilo in Calabasas, California 40 years ago, Countrywide's expansion into the subprime market helped fuel the housing boom by offering loans to high-risk borrowers. But as home values began dropping in 2007 and borrower defaults skyrocketed, Countrywide's lending practices came under the spotlight of legislators, regulators and consumer advocates. Countrywide's stock price collapsed in 2007, falling 80 percent, wiping out $20 billion in market value. The U.S. government provided Countrywide $5.2 billion to keep the company viable, even after BofA's purchase. In 2009, the bank rebranded Countrywide as Bank of America Home Loans to shed any connection to its toxic past.

Cox, Christopher:
Christopher Cox is the 28th Chairman of the Securities and Exchange Commission. President George W. Bush appointed Cox on June 2, 2005 and he was sworn in on August 3, 2005. Before being selected for the position, Cox had been a Republican member of the House of Representatives representing California's 48th district since 1989. He resigned the SEC Chairmanship on January 20, 2009, at the end of the Bush administration.

Cox was born on October 16, 1952, in St. Paul, Minnesota and attended St. Thomas Academy in Mendota Heights. In 1973, he earned a Bachelor of Arts degree from the University of Southern California in a three-year accelerated course. Cox then attended Harvard University, where he earned a Master of Business Administration degree from Harvard Business School and a Juris Doctor degree from Harvard Law School in 1977. He went on to work at Lathan & Walking, an international law firm where he started as an associate and thenbecame a partner. He stayed with the firm until 1986 as a member of the firm's national management. He took some time off during 1982 and 1983 to teach federal income tax at Harvard Business School.

In 1986, Cox served under President Reagan as Senior Associate Counsel to the President and in 1988 he was elected to represent California's 40th District in the House of Representatives. His district changed numbers in 1993 and became the 47th District and again in 2003, when it was renumbered as the 48th District. In his tenure in congress, Cox served in the Majority Leadership of House of Representatives and was Chairman of different committees including the House Policy Committee, the Committee on Homeland Security, and the Select Committee on U.S. National Security, among others.

Christopher Cox and his wife Rebecca have three children.

Credit Ratings:
A credit rating measures the creditworthiness of a financial institution and analyzes the ability of how a financial institution repays the loans it has taken, and also the amount of interest that is accrued. The credit rating of a financial institution also influences the interest rates on the bonds and debentures issued by those institutions. A high credit rating for a financial services provider or bond issuer means the amount of interest paid to the investors is low because they consider the investment to be less risky. A low credit rating given to a financial services provider or bond issuer means the amount of interest paid to the investors is high because the investors consider the investment to be more risky and the issuer tries to compensate the degree of risk by paying a higher rate of interest.

There are 1,000 credit rating agencies, including A.M. Best, Moody's, Fitch Ratings and Standard & Poor's Ratings.

Consumers also have credit ratings, now known as credit scores, that help banks and lenders determine their creditworthiness. The best known of these evaluations are outsourced to Fair Isaac Scoring Service, which rates their prospects on the FICO scale. The lender will also likely order a credit report from one of the large national credit reporting agencies to verify sources of income, debt and payment history.

Credit, Collateral, Character, aka Three C's:
Three things creditors examine to determine creditworthiness: credit, collateral and character.

Credit is a borrower's ability to repay based on income and current debt. Lenders want to see current income that is high enough to cover current debts with money left over. They want to know that a consumer earns more than they owe, known as positive net worth.

Collateral can be property or other valuables used as security to guarantee the repayment of a loan, something of value that could be sold in case the consumer defaults on the loan.

Character is defined as the responsible handling of past debt as well as stability in keeping a job and a residence, typically at least a year, the longer the better, without foreclosure or bankruptcy.

CDS – Credit Default Swaps:
Credit Default Swaps are contracts often compared to insurance policies that promise to cover losses on certain securities in the event of a default. Typically, these securities include municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and other financial institutions. The buyer of the credit default insurance pays premiums over a period of time with the assurance that any losses will be covered if a default happens. But while banks and insurance companies are regulated and their savings are guaranteed, the credit swaps market are not currently regulated and the money can vanish in the hands of a less creditworthy buyer. Contracts are traded, or "swapped," from investor to investor without outside oversight of those trades that would ensure the buyer has the resources to cover the losses if the security defaults. And both the insured and the insurer can buy and sell these instruments.

The top 25 banks in the U.S. held more than $13 trillion in credit default swaps, acting as either the insured or insurer at the end of the third quarter of 2007. The market for credit-default swaps was largely unknown until the downfall of Bear Stearns and the federal rescue of insurer American International Group.