A Credit Crisis Lexicon

We're getting quite a few new readers these days, thanks to this ongoing crisis. And it's becoming apparent we need a lexicon. Here's my stab at it ... we'll update it as terms come and go into vogue. And of course, you folks are welcome to make suggestions.

Update: Some of you wrote in. Many of the things you asked about can be found in our glossary. But some of the more popular, we've added below ...


Capitulation: Point at which investors in the market give up trying to recapture lost gains and sell everything. Many pundits argue this is the magic point where the market will bottom.

Commercial Paper (CP): Short-term debt issued by companies to fund ongoing operations. The Fed recently moved to start buying this kind of debt, since banks are pulling back from it. (Our guest blogger Tony Crescenzi keeps an eye on this area).

Credit Default Swap: Essentially, it's an insurance policy on a bond. (The more strict and complicated definition is in our glossary). I buy your bond, but I'm worried you might never make good on it. So I pay Harry a small premium, say, every month. If you default, Harry will cover the bond. Nice hedge. (The problem starts when everybody uses Harry's pledge as a bet on whether or not you'll pay).

Derivatives: Securities essentally cobbled together out of other investments. (Again, a more straight-laced, precise definition is in our glossary).

Libor: The London Interbank Offered Rate, the interest rate at which banks are willing to lend to one another, for varying amounts of time. Those rates, a benchmark for mortgages and other consumer loans, have been climbing. (Check them here)

Mark-to-Market: An accounting rule (FASB 157) that forces companies to value assets at current market prices. But then how do you value an asset when there is no current market for it? That's forcing some banks to write down the value of certain mortgage securities, even though those securities might actually produce some returns in several years. (This rule was an offspring of the Enron-WorldCom days, when some companies slapped outrageous values on assets to inflate balance sheets). Update: One reader complained my definition was dangerously simplistic. Sure, we can get very complicated, very quick. And there are whole debates about mark-to-market's contribution to the current crisis. I'm just trying to help out newbies here. Want to dive deeper? Start with this video.

Mortgage Backed Security (MBS): A security backed by mortgages. Once upon a time these were loved. Then people started missing mortgage payments. Then the love was gone. These are the kinds of "toxic debt" the government and bank folks are complaining about.

Reverse Auction: A seller offers the lowest price they'll be willing accept for an asset.

TARP: The government bailout law [Troubled Asset Relief Progam] authorizing, among other things, the Treasury Department to funnel $700 billion into the distressed banking sector. (Read about it here)

TED Spread: The difference between interbank loans and U.S. government loans. It serves as an indicator of the bank sector's willingness to lend to one another. Right now it's pretty high, which means banks aren't really all that willing. (Check it here)

Uptick Rule: An old rule that only allowed a short order on a stock only after that stock sold for a higher price. (The Fast Money traders have some thoughts on that rule).

More education:

Some basic market terms and strategies can be found at the Fast Money Trade School.

You can also find our glossary here.